An abysmal first quarter as GDP shrank 0.7 percent. Because a large portion of the decline was attributed to a one-off adjustment, GDP should move to positive growth from the second quarter. The job gains will continue and reach over 2 million this year and thereby support real estate activity. Still, the negative first quarter GDP implies inconsistency and on-going subpar performance in relation to America’s potential.
Specifically, GDP declined 0.7 percent in a standardized measurement of annualized basis during the first quarter. Personal consumptions by consumers increased at a respectable pace of 1.7 percent. But businesses held back with private sector investment in spending for equipment and software mildly contracting. Government spending overall fell principally as state and local government reduced expenditure and also from cuts to federal defense spending. Federal non-defense spending rose.
Exports fell and hurt GDP. The strong dollar makes selling of U.S. manufactured products more difficult. Imports meanwhile grew and hurt GDP. The strong dollar makes foreign goods cheaper for Americans. One positive impact of the strong dollar is that it keeps interest rates lower. The housing sector, always sensitive to interest rates, rose.
Going forward, GDP should turn positive. The housing sector, particularly related to new home construction, is poised for further rise. Businesses have an abundance of profit and cash reserves. Small entrepreneurs are enticed with low interest rates. Therefore, it would be completely out of character for business spending to not rise given these conditions. Finally, the cuts to defense spending are bound to end. The second quarter GDP is forecasted to rise by 2.2 percent and then reach closer to the cruising speed of 3 percent in the second half. For the year as a whole, GDP will growth by 2.0 percent.
The long-term average rate of GDP expansion in America has been 3 percent. Sadly, the annual GDP growth has been less than 3 percent for nine consecutive years. Hypothetically, had the GDP growth been 3 percent, matching the historical average, a typical American would have additional $5,000 in their pocket. Home sales are expected to rise this year to 5.2 to 5.3 million from 4.9 million last year. But a faster GDP expansion would have correlated to home sales reaching closer to 6 million. There are meaningful consequences to prolonged sub-par economic activity.
Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.