Economy Is Revving Up

November 18, 2003
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WASHINGTON - The question posed at the 2003 Fall Construction Forecast Conference was "Is this the ‘real' second-half recovery?" The consensus among the economists present was that the United States economy has definitely bounced back in the second half of 2003 and is preparing to take off in 2004.

The conference, put on by the National Association of Home Builders (NAHB), was led off by David Seiders, chief economist of the NAHB. Seiders noted that back in April there was massive uncertainty about the economy due to the war in Iraq and the tax cut package proposed by the Bush administration. "The general consensus was for a weak first half of the year and a very good second half." Seiders remarked that the NAHB has raised its expectations for the second half.

He said that real GDP (gross domestic product) growth would be dynamic for the third quarter and would still be solid over the balance of the year. His predictions for 2004 called for 4.5 percent growth in the first quarter of 2004, 4 percent for the second quarter, 3.8 percent for the third quarter, and 3.7 percent for the fourth quarter.

Inflation "is still being squeezed down" at around 1 percent, he stated. Productivity growth has been contributing to lowering inflation. The unemployment rate is expected to decline modestly, he said, and payroll employment growth is expected to grow sharply through mid-2004.

Seiders said that the Federal Reserve will allow its federal funds rate to stay flat for now. "In the fourth quarter of 2004 it will probably rise," he commented, after the election. Home mortgage rates will rise moderately, reaching "7 percent by the end of 2005."

Looking at single-family housing starts, Seiders said that "growth has been outlandishly strong since 2001." He asked, "Have we overrun the market? This forecast says it will fall back modestly in 2004," but single-family starts will remain at a historically high level.

Multifamily housing starts have been relatively constant over the last couple of years, he said. He forecasted that it would remain on an even keel with some inevitable easing. Total new housing, he maintained, is "close to sustainability."

Residential remodeling is "back in an aggressive growth mode." It was up in 2002, and is predicted to be up in 2003 and 2004.

Nonresidential construction collapsed beginning in 2001, Seiders said. He asserted that the nonresidential market - including industrial, office, and other commercial construction - has now bottomed out and will begin increasing.

Industrial, office, and other commercial construction, historical and forecast, per David Seiders, NAHB.

Prepare For Liftoff

Dr. Joel Prakken, chairman of Macroeconomic Advisers LLC, labeled his presentation "Prepare for Liftoff!"

He predicted 5 percent-plus growth for the second half of 2003 and around 4-1/4 percent growth in 2004. "This growth will lower unemployment to 5-1/2 percent by the end of next year," he said.

"A combined crescendo of monetary and fiscal policy stimulus in the second half is driving growth," Prakken related. Lean inventories are helping companies, he said, as well as continued acceleration in productivity.

Prakken doesn't expect the first monetary tightening until early 2005. Inventories are now at a historic low, he noted, and companies have still been cutting. They are forecasted to rise in both 2004 and 2005.

Productivity initially rose due to capital investment. "But now productivity is still up while capital investment has been dropping," he said. Companies are now getting productivity growth by doing more work with less people. That's why the unemployment rate grew and remains at about the same level, said Prakken.

"Household investment is on the mountaintop," he asserted. This is as high as it will get.

Residential investment and consumer durables remained positive in this recession; usually they are negative, Prakken pointed out. "These areas will probably fade in 2004" while other areas drive economic growth.

Housing Still Looks Good

Michael Moran, chief economist of Daiwa Securities America Inc., remarked that "Housing starts will probably back away from what we've been seeing." He forecasted that starts will be around 1.65 million units next year. But this still looks good historically, he said. "It looks slow only in comparison to this year."

There is "less interest sensitivity in housing right now," said Moran. Even if interest rates go up, housing will still do relatively well, he proclaimed. The higher homeownership rate has created a broader market.

Household net worth is generally strong, he added. Despite declines in the last three years, it is still at a relatively high level.

The ratio of debt to income has been steadily rising, Moran stated, but the credit delinquency rate has been declining since the recession.

Looking at business spending, Moran sees recovery underway. Business equipment investment is picking up, he said. It will be "a gradual pickup" and it looks like it will be sustained. He agreed with Seiders that business construction "has bottomed out" and will also pick up.

"What about excess capacity?" asked Moran. "The motivation to invest is to boost productivity," he responded. "I don't see excess capacity as a problem."

We're still going to get several more quarters of strong productivity growth, he maintained, so businesses won't need to add to their employment rolls right away.

For his overall economic outlook, Moran predicts solid GDP growth of 4.2 percent in the fourth quarter of 2003 and a growth rate of 4.1 percent for 2004.

Publication date: 11/24/2003

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