INSIGHT: US housing, overall economy could double-dip

02 September 2010 16:59  [Source: ICIS news]

By Joe Kamalick

WASHINGTON (ICIS)--New data and analysis by private sector economists and federal policymakers suggest that the US housing sector might once again be diving toward a new bottom - and that the national economy also could stumble into a double-dip recession.

Conventional wisdom holds that while the year-old US economic recovery definitely has slowed and the second half of this year might see even slower growth, the nation’s industries and commerce for sure will pick up speed in 2011.

No question that the recovery has slowed. Fourth quarter 2009 gross domestic production (GDP) was at an annualised rate of 5.6%, but in the first quarter this year GDP eased to 3.7% and the second quarter’s performance fell to 1.6%.

Nonetheless, many forecasters contend that things will pick up with the new year.

Underlying those forecasts, however, are assumptions and hopes that new jobs will be created and pent-up consumer demand will blow into the economy, filling the sails of business and commerce.

But those assumptions may be dead wrong and the hopes unrealistic, according to Federal Reserve Board officials and private sector economists.

The US housing sector, which typically has led the nation out of previous recessions, may offer a capsule example of what could happen in the overall economy.

Real estate market analysts and economists with credit agency Standard & Poors (S&P), Yale University and Wellesley College said this week that with the April end of the federal tax credit stimulus for home buyers, housing data suggest that the sector could be poised for yet another major downturn.

Last week the housing industry reported a sharp decline in July for sales of existing homes, and the Commerce Department said that sales of new single-family residences fell to an all-time low that month.

The housing industry, especially new home construction, is a key downstream consuming sector for a broad range of chemicals and derivatives that are used in the manufacture of construction supplies or as end-use components in home structures.

David Blitzer, chairman of S&P index operations, said that while second quarter numbers for housing were upbeat, largely due to the stimulus of federal tax credits for home buyers, “other more recent data on home sales and mortgages point to fewer gains ahead”.

Robert Shiller, Yale economics professor and chief economist at MacroMarkets, said that the “striking, catastrophic decline in the volumes of home sales that began after the peak in 2005 ended in 2009” with the beginning of the federal tax credit incentive for home buyers.

“But now it is down again,” he said of home sales since the incentive ended.

“This is an exceptionally uncertain time,” Shiller said, adding that “with the tax credit gone, housing prices could go down again.”

Karl Case, economics professor at Wellesley and founding partner in Fiserv, Case, Shiller, Weiss, Inc, noted that US housing starts - the construction of new homes - are at a 50-year low and housing affordability “is the best we’ve ever had with home prices down by 30% and interest rates exceptionally low”.

Despite that record level of home affordability, people are not buying.

“The thing that is troubling me is demographics,” Case said.

“We should be seeing household formations in the range of 1m to 1.5m annually,” he said. 

Household formations occur when young people graduate from college or otherwise leave the family nest and enter the workforce, then rent apartments or get married and buy a house.

“But I’m worried that we are going to have fewer household formations this year than we think we have,” Case said, noting that some analysts suspect that new households might number as few as 850,000 this year.

“Kids are staying home, others are doubling up, we’re not getting as many immigrants as before, and more people are leaving,” Case said, “and that equals housing vacancy rates staying very high.”

David Crowe, chief economist at the National Association of Home Builders (NAHB), agreed that what may be happening with household formations “is the critical element” in housing forecasts.

“We know we’ve had a decline in the number of net additional household formations from 2007 through to current available figures, so it is a legitimate question,” Crowe said:  “When will that delay in formations be reversed and get back to the 1m to 1.2m level?”

The uncertainty about what is happening in household formation development “is why I and other economists say it is all up to job creation,” Crowe said.

“New households are formed when people enter the labor force, but if you can’t get a job, you can’t buy a house - and you can’t even rent an apartment,” Crowe added.

Martha Gilchrist Moore, senior director of policy analysis and economics at the American Chemistry Council (ACC), agrees that prospects for increased employment that would enable new household formations are murky at best.

Citing the second quarter GDP growth decline to a rate of 1.6%, Moore noted that “we need GDP to be at 2.5% just to maintain current employment”.

In addition to high unemployment keeping would-be young homemakers still living with mom and dad or doubling up with a working sibling, Moore said that household formations also are reduced by a small but marked decline in US birth rates for the past two years, typical in risky economic times.

And fewer immigrants, legal or otherwise, are coming to the US, she said, although reliable figures are hard to find.

So, the nation needs job growth to spur consumer spending and household formations, which in turn ramp up demand for goods and services and housing.

But even the Federal Reserve Board is worried that job growth may be a long time coming.

In the minutes of the 10 August meeting of the Fed’s rate-setting Federal Open Market Committee (FOMC), the central bank’s top economists and policymakers noted that recent “incoming data on the labor market were weaker than had been anticipated”.

“The unemployment rate declined a bit, but that reflected a decrease in labor force participation rather than an increase in employment,” the meeting minutes relate, citing the decline from 10% unemployment to 9.5%.

Yet US companies large and small are reporting record amounts of cash on hand, money husbanded and set aside as employers cut payrolls and increased efficiency during the recession. Why aren’t they hiring?

The Fed’s economists and analysts reported that “business contacts again indicated that uncertainty about future taxes, regulations and healthcare costs made them reluctant to expand their workforces”.

“Many policymakers judged the downside risks to the US recovery had become somewhat larger,” the FOMC meeting minutes said.

Some Fed policymakers “saw the incoming data as suggesting a greater risk that private demand for goods and services might not grow enough to offset waning fiscal stimulus and a smaller impetus from inventory restocking”, the record said.

And some committee members “expressed a concern that in this context any further adverse shocks could have disproportionate effects, resulting in a significant slowing in growth going forward”.

That’s Fed-speak for double-dip recession.

There wouldn’t have to be much slowing of growth to get US GDP down from the second quarter’s 1.6% to zero or into negative territory.

Nevertheless, both NAHB’s Crowe and ACC’s Moore remain sanguine about a slow but steady recovery in 2011. Neither sees a double-dip recession for either housing or the economy as a whole.

“I think we’re skating along at different parts of the bottom,” Moore said. “It is a challenging situation, and it’s not going to turn around quickly.”

Crowe contends that the highest probability of outcomes for housing and the US economy in general is a release of pent-up demand in the new year that drives the recovery forward.

He is even more confident that there will not be a double-dip in the housing sector, if only because “we haven’t gotten out of the first dip yet”.

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By: Joe Kamalick
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