Eye on the Economy: Lackluster GDP Growth at the Start of 2016


***Eye on the Economy is a biweekly survey of NAHB’s economic and housing analysis.

The initial estimate of GDP growth for the first quarter of 2016 was weaker than most economists expected, coming in at an anemic 0.5% annual rate, according to the Bureau of Economic Analysis. Economic growth has been steadily softening since the second quarter of 2015, when it topped out at a 3.5% pace. Factors holding back growth at the start of 2016 include slowing personal consumption expenditures and falling exports.

But the largest headwind for first quarter growth came from declines in the energy extraction sector. Over the long run, declines in oil prices will continue to act as a tax cut for American consumers, but since the middle of 2015, business investment declines associated with oil and gas development have hurt the economy.

In contrast, a bright spot at the start of the year was housing. In fact, housing’s contribution to economic growth (0.49%) nearly equaled the entire headline gain of 0.5%. In other words, absent home building’s economic impact, the economy would have posted no net growth for the start of the year.

Construction spending data for March illustrate the degree to which housing development has been led by multifamily construction. On a year-over-year basis, multifamily spending (the dollar value of completed projects) was up almost 35% in March. Single-family spending posted a respectable 13% gain, while improvement spending was up just over 2% year-over-year. NAHB’s forecast calls for a slowing of multifamily construction in 2016, with a pickup for single-family starts as markets attempt to find a balance between supply and demand for rental apartments.

The forecast also sees additional gains for new single-family home sales. The pace of sales in March was down slightly (-1.5%), albeit from an elevated February rate. The seasonally adjusted annual rate of 511,000 in March, as reported by HUD and the Census Bureau, was 5.4% higher than March 2015 –marking the return to a more gradual and sustainable pace.

Total inventory continued to rise to 246,000 homes (a 5.8 months’ supply) compared to 205,000 a year prior. Builders are adding homes to the market as existing home inventory levels remain flat and pending existing home sales increase.

Housing gains can continue as long as the economy continues to produce jobs. As the unemployment rate hovers around 5%, the labor force participation rate trends down, and GDP growth disappoints, it remains to be seen if the job market can continue to be a source of good news. However, the elevated number of open, unfilled jobs in sectors like construction is a positive sign. Despite recent weakness, employers are still looking to hire.

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