Economic outlook: A slight downslide

May 5, 2000
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WASHINGTON, DC — At the National Association of Home Builders’ (NAHB) 60th-annual Construction Forecast Confer-ence here, the general consensus among the economists speaking was that the economy and housing will begin to slow, despite a strong first quarter.

The conference was kicked off by David F. Seiders, senior staff vice president and chief economist of the NAHB, who provided a national economic and housing outlook. Seiders noted that in 1997, the talk was that an economic and housing slowdown was imminent. Three years later, however, “The economy still has a lot of strong forward momentum.”

The unemployment rate has been driven down further over the past three years. Six million new housing units were built in that time, and the home ownership rate now stands at 67%.

“Over the last three years, we’ve been fretting that this is unsustainable,” Seiders said. But the first quarter of 2000 was again strong.

We’ve seen “decidedly above-trend growth since 1997,” he stated, and it should continue through 2000. But he expects it to weaken in 2001.

Single-family housing starts are expected to dip this year and multifamily housing also “should lose a little ground.” Mobile homes, Seiders said, were overproduced and they’re already on a sharp downslide. Residential and commercial construction combined, he added, shows a slight dip.

Residential remodeling, however, will remain strong and stable.

Market influences

Joel Prakken, chairman of Macroeconomic Advisers, LLC, spoke on housing and the stock market. He said that for sustainable performance, a growth rate consistent with a stable unemployment rate is 3.75%.

But GDP (gross domestic product) growth over 1999 was 4.6%. For the first quarter this year, it was a very strong 6%. “Somehow growth has to slow,” Prakken said.

The Federal Reserve funds rate is going to rise to 7% by year end, he predicted. This will serve to slow the economy as well as housing starts. The stock market wealth that has been generated, on the other hand, boosts home ownership and encourages more expensive homes.

However, housing starts are hurt more by high interest rates than they’re helped by high wealth.

Susan M. Hering, chief economist for Carr Futures, Credit Agricole Indosuez, titled her presentation, “U.S. Golden Era Losing its Luster.” However, she has a slightly brighter outlook for housing than either Seiders or Prakken.

Hering said that growth has been accelerating. The borrowing spree is continuing and banks are still willing lenders. Interest rate increases by the Fed are quite small, and it is not pressing that hard to restrain the economy.

For Edward F. McKelvey, vice president and senior economist of Goldman Sachs, our high-flying economy still has “plenty of gas,” so there’s “no need to land.” He declared that “There will probably not be a landing in the next couple years.”

The growth trend is quite solid, McKelvey said. Housing activity is moderating, but it is still strong.

He believes the housing industry is less interest rate sensitive than it was before. However, the peak in activity for housing has already passed, he stated. “So our best guess is a gradual decline.”

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