Washington, DC, March 13, 2006—According to the Mortgage Bankers Association (MBA) forecast, incoming economic data over the past few weeks indicate a strong first-quarter rebound in GDP growth from the revised 1.6 percent annual rate of the fourth quarter.
The association said that consumer spending in constant dollars registered another solid increase in January; the last three months have recorded an 8 percent gain at an annual rate, following the Katrina-induced slump in the late summer. Rising new and unfilled orders for capital goods other than aircraft indicate that business capital spending is picking from the fourth quarter slowdown. With energy production in the Gulf region also recovering, first quarter real GDP growth appears likely to hit a 5 percent annualized growth rate. If so, the average growth for the fourth and first quarters will be only a little below the average of the first three quarters of last year.
A month ago, the association said it set forth the case for a moderation in economic growth during the course of this year to about a 3 percent annual rate during the second half. That expectation was predicated on the presumption of a decline in housing activity and a significant slowdown in the rise of consumer spending.
Although mild winter boosted housing starts in January, the MBA said other data leave no doubt that housing activity is on the decline. Single-family home sales have fallen 8 percent since their peak last June, and the inventory of unsold new and existing homes is on the increase. Home prices are still rising in most areas, but less rapidly than earlier. Applications for loans to purchase homes--an indicator of future sales--have also fallen. Since mortgage interest rates are still at moderate relative levels by historical standards, the impending decline in home building need not be large, but residential construction this year will moderate overall economic growth, not add to it as it has during every year for the past decade.
A moderation of consumer spending is still a forecast, not a fact, but there are good reasons for expecting it. High energy prices are bleeding off consumer purchasing power; the personal saving rate is in negative territory for the first time since the Great Depression; consumer confidence has turned a bit shaky; adjustable rate mortgages are being repriced; the alternative minimum tax will affect a larger number of taxpayers, and the prospect of significantly slower increases in real estate values, if not outright declines, should give rise to more temperate buying patterns by households. Moderation in the pace of economic growth over the course of this year still seems a reasonable forecast. Indeed, slower growth may be essential to ward off a further up creep of inflation.
Core inflation, as measured by the year-over year change in the price index for personal consumption expenditures, is currently running close to 2 percent, the upper end of the 1 percent to 2 percent range that many Federal Reserve officials have described as their “comfort zone.” Headline inflation has been above core inflation for the past two years because of rising energy prices. While there has been little spillover of higher energy prices into core inflation as yet, Federal Reserve press releases since hurricane Katrina hit the Gulf coast last August have indicated concern regarding the possible threat to inflation of higher energy and other costs. The releases following the December and January Federal Open Market Committee (FOMC) meetings, however, also note that “…possible increases in resource utilization…have the potential to add to inflation pressures.”
