Eye on the Economy: Waiting for Stronger Growth


*Eye on the Economy is an NAHB newsletter that is published every two weeks and takes a larger view of recent economic and housing policy news. Beginning today, we will publish this biweekly economic overview on Eye on Housing as well.

The new year opened with hope that the 3% growth rate of Gross Domestic Product (GDP) reported for the end of 2011 would lead to stronger job growth and improving housing markets. While January and February offered positive economic news, March and April reporting suggested that unusually warm weather may have accelerated some economic activity at the expense of the spring months.

Overall, first-quarter GDP grew at a subpar, seasonally adjusted annual rate of 2.2%. Declining growth in inventory investment and weak nonresidential investment were the primary reasons. Increases in inventory investment boosted GDP growth at the end of 2011 by 1.8 percentage points. In addition, federal government spending also recorded a significant (5.6%) decline.

However, the long-term trend remains positive for economic growth. Personal consumption and exports were up for the first quarter of the year. And excluding the inventory adjustment, growth in GDP increased from 1.1% to 1.6% from the last quarter of 2011 to the first quarter of 2012.

Nonetheless, the slowdown was consistent with weak employment growth. The Bureau of Labor Statistics (BLS) reported only 115,000 net jobs were added to the economy in April. The unemployment rate ticked down to 8.1%, but this is a “good news is actually bad news” situation: The rate fell because 342,000 people stopped looking for work and left the labor force. Declines like these are bad for household formation and housing demand. Nonetheless, the recent average monthly employment gain stands at 200,000 jobs, so a pickup in GDP should lead to more robust job growth.

The BLS March Job Openings and Labor Turnover Survey reveals a disconnect worth watching in future months. The job openings rate has increased steadily since the end of the Great Recession. Total job openings totaled only about 1.75% of employment in early 2009. The openings rate is now at 2.7%. However, the hiring rate has experienced only a slight uptick over the same period, increasing from about 3% to 3.3%.

An obvious question: If the number of job openings is growing, why have we not experienced a corresponding increase in hiring and thus net job creation?

Two possible explanations seem likely. First, there may exist a skills mismatch between jobs needing to be filled and available workers. Second, ongoing problems in the housing market, particularly the ability of new home buyers to obtain affordable credit, may be preventing prospective workers from relocating to accept job opportunities.

Despite the recent slowdown, consumer confidence remains steady according to both the Conference Board’s Consumer Confidence Index and the University of Michigan Consumer Sentiment Survey. In fact, the three-month moving averages of both surveys continue to show dramatic improvement since the third quarter of last year.

The recent pause in improving economic conditions has been reflected in recent housing market data. The May NAHB/First American Improving Markets Index fell slightly from a count of 101 to a total of 100 improving markets, according to an evaluation of local residential construction, housing prices and job growth. The index continues to show about one-quarter of all metropolitan areas as improving according to this conservative measure.

Total private residential construction spending was, in fact, up slightly (0.7%) during March, according to the Bureau of Economic Analysis. Single-family construction led the way, increasing 3.8% in March, more than offsetting the 1.3% decline from February. Multifamily, which has been the standout for home building in the past year, was down in March by 3.1%, although the February gain was revised up from 2% to 3.6%. However, home improvement slumped for the fourth consecutive month, registering a 1.9% decline.

The lack of growth for remodeling spending in recent months is consistent with NAHB survey results. The NAHB Remodeling Market Index fell one point for the first quarter of 2012, falling to 47. Both components of the index, which measure current market conditions and future remodeling activity, fell during the quarter. It seems reasonable to believe that the end of the remodeling tax credit (the section 25C energy-efficient upgrade credit) is in part responsible.

Other housing indicators also show a slowing of improvement. For the first quarter of 2012, the Census Bureau reported that the homeownership rate fell to 65.5%, after three quarters of hovering around 66%. House price data from the Case-Shiller and Federal Housing Finance Agency indicate that prices were relatively unchanged for March.

Yet there are signs of future growth in housing demand. Perhaps most important is that the National Association of Realtors Pending Home Sales Index for March increased more than 4%, reaching its highest level since the end of the home buyer tax credit period. This level suggests higher rates of existing home sales in the near future.

However, builders should be aware of price increases for building materials. In particular, NAHB has been tracking the run-up in gypsum prices and, more recently, lumber prices due to supply issues in Canada. The increase in lumber prices may trigger a reduction in the import tariff.

Finally, May is National Remodeling Month. With this in mind, NAHB recently produced research on home improvement issues. The research finds that the existing housing stock is in worse condition that previous estimates suggested and concludes that more than 10 million homes are physically inadequate, twice the total of previous estimates. And NAHB survey data indicates that bathroom and kitchen remodeling projects were the most common home improvement jobs in 2011.

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