Economists see recovery after 'shallow? recessionary period

The economy is heading into what is projected to be a "mild, brief recessionary period" that will be followed by a rebound in the second quarter of 2002, according to economists at the Semi-annual Construction Forecast Confer-ence held by the National Association of Home Builders in mid-November.

According to an NAHB news release, the organization's chief economist, David Seiders, said, "Following a meager 0.3 percent advance in the second quarter and a 0.4 percent contraction in the third quarter, the economy definitely is continuing to weaken in the final quarter of 2001."

He added, "Assuming continued success of ongoing military endeavors and that no additional serious terrorist activity occurs in the U.S., we're projecting a 2.5 percent contraction in the fourth quarter followed by an additional 0.5 percent setback in the first quarter of 2002 before positive growth resumes in the second quarter of next year."

Unemployment

Seiders said that he expects unemployment, now running around 5.4 percent, to reach 6 percent by mid-2002 and that the housing market will not be immune to the effects of further economic weakening this year. "Total housing starts will decline about 10 percent in the fourth quarter, to a 1.44 million unit rate," he said, "then begin a recovery process in early 2002." On an annual basis, NAHB projects housing starts will hold at around 1.57 million units for 2001 and 2002 (slightly below the 2000 pace) and then rise to a robust 1.67 million units in 2003 as pent-up demand returns to the market.

Seiders also estimates that single-family housing production will hit 1.25 million units for all of 2001 up almost 1 percent from last year and then remain at 1.24 million units for all of 2002. Multifamily starts, he said, should be down about 4.4 percent to 326,000 units this year, then rise by just over 2 percent next year to 334,000 units.

Seiders noted that residential fixed investment posted solid growth in the first half of 2001 before weakening somewhat in the third quarter. He now predicts a 14-percent contraction in the fourth quarter, with only a slight negative growth rate in the first quarter before the measure resumes positive growth through the latter part of 2002 and beyond.

Home equity

Due to the mildness of this recession and the "immense amount of home equity accrued in recent years" from improving home values, residential remodeling will remain relatively strong through the next three quarters, Seiders said. "This segment has positive momentum due to recent high levels of existing home sales." He added that "One of the real success stories in this era is homeownership, which has continued to expand all year and should keep moving up from a strong 67 percent."

Economists Maury Harris of UBS Warburg and Michael Moran of Daiwa Securities America largely concurred with Seiders' forecast. Both cited numerous reasons to believe that the American economy will not dip too far or too long in the wake of September's terrorist attacks.

Both lauded the Federal Reserve's lowering of interest rates in January of this year.

Moran noted that in previous recessions, the Fed didn't begin lowering rates until negative growth set in. "It takes six months for the stimulative effects of these moves to materialize," he said, adding that the Fed's moving so promptly this time bodes well for a quick recovery.

The Fed

All of the economists at the conference predicted that the Fed will lower the federal funds rate by at least a quarter-point at each of the next two meetings of its Federal Open Market Committee in December and late January. After that, they predicted, the Fed will likely hold off on further loosening of monetary policy at the FOMC's March meeting as signs of recovery emerge.

Given these expectations, they believe that long-term mortgage rates will remain in the 6.4 percent to 6.6 percent range through the rest of this year and most of 2002.

According to the economists, other factors pointing to a quick economic turnaround include indications that travel and shopping behavior are returning to normal after Sept. 11. Harris predicted, "With the passage of time and more visible demonstrations of public safety, people will go back to normal spending and investment habits."

Retail sales

Government figures on retail sales for October, released the day of the conference, also bode extremely well, he said. In comparison to an expected 2.5 percent gain that month, the retail sector expanded by 7 percent.

Harris also noted that the rate of technological change and innovation demonstrated by the number of patents granted in the year to date remains quite strong, and he cited recent surveys indicating that Americans believe life in the post-Sept. 11 era will "return to normal" or better than normal before long.

Another positive factor is the fiscal stimulus package now being debated in Congress, which Harris said he believes is "likely" to pass this year and "will probably pump another $90 billion into the economy."

Michael Moran of Daiwa Securities was slightly more optimistic about the prospects for an economic recovery taking hold as early as the first quarter of next year. "A small increase in GDP is possible in early 2002," he said. "In all, this will be a short, shallow recession," thanks to prudent business inventories, a trade imbalance that is causing foreign producers to shoulder some of the effects of weakened consumer demand, and Congress's expected economic stimulus package.

Household sector

Moran also noted that "The household sector is in much better shape than the media has reported." The overall assets-to-liabilities picture for individual households is not bad, he said, in part because of the surge in mortgage refinancing activity, which he said is helping many households better manage their debt.

In another conference seminar, Fannie Mae Chief Economist David Berson and Freddie Mac Deputy Chief Economist Frank Nothaft addressed the question of whether house prices are headed for a fall as the economy weakens. They concurred that home appreciation will decline to a rate of about 2.5 to 3 percent in 2002 down from an average 8 percent for the last year. "But that's still a comfortable margin above zero," Berson said.

"Will home values crash? Absolutely not," said Nothaft. "House-price growth will slow, but mitigating factors such as fiscal and monetary stimulus measures and continuing low inflation and interest rates will keep things from getting out of hand. Our view is that housing markets across the country are very well balanced."

Lending an historical perspective, Berson said, "On a national basis, in the last four recessions home values did not drop."

He and Nothaft also credited the very favorable inventory situation in the home building sector for their confidence that no market glut is forthcoming. "New-home inventories are exceedingly lean," said Nothaft, and little speculative building is taking place. "Right now there is no evidence of overbuilding which is far from what was the case when we entered the last recession in 1990."