- With the exception of the strong housing market recovery, the broad U.S. economy continues to underperform. This week data on the GDP growth of 1.8 percent in the first quarter was uninspiring. The long-term historical average GDP growth is 3 percent. After a recession, GDP tends to grow even faster at 4 to 6 percent in order to compensate for the lost output during the recession. That has not been happening this time. After the harsh 2008-2009 Great Recession, this year will mark four consecutive years of subpar 2 percent GDP growth in the U.S.
- Housing is one bright spot. Residential construction rose at 14 percent in the latest data. Moreover, consumers are spending at a respectable pace thanks to the gains in the housing wealth. In all likelihood, without the housing market recovery the U.S. would be teetering on a recession.
- A quick review of the individual components of the economy (a fun exercise for those who took an Econ 101 course) shows that the prospects of economic growth remain in place:
- Consumer spending grew at a respectable 2.6 percent. With housing wealth rising and some jobs being added, consumer spending will continue to be at around 2 to 3 percent.
- Business investment spending grew at a 0.4 percent. Quite disappointing. But the prospect for growth is good because big companies have massive piles of cash and profits ready to be deployed. Big businesses, however, have been indicating less favorable business climate to spend that cash while small businesses start-up activity is still trending low.
- Government spending fell 4.8 percent. Sequestration is part of the story as well as the need to balance the budget by state and local governments. Though the government spending cuts are clearly a drag to the current economic growth, lower deficits can enhance future prospects for the economy. A case of short-term pain for long-term gain? The amount of spending cuts will steadily diminish in the upcoming months since many state and local governments are now running budget surplus.
- Net exports are not moving anywhere. Though the U.S. still imports more than it exports, there was no change in figure so the net exports had essentially no impact on overall GDP growth. The prospect for improvements in net exports looks good because of the energy renaissance in the U.S. Both oil and natural gas production have been rising in places like North Dakota and Pennsylvania and that will reduce the level of imports over time.
- The forecast is for GDP growth of 1.8 percent for all of 2013 and then picking up speed to 2.7 percent for all of 2014. That translates into about 2 million net new jobs this year and maybe 2.5 million next year.
- Note: while the U.S. is trying hard to grow at 3 percent (the historical average rate), China has been growing at 7 to 10 percent a year. If such a trend continues then China’s broad GDP will surpass America’s within 15 years.
- As a practical matter of China’s keen focus on economic growth, China invests twice as much money in Africa compared to the U.S. even though China’s current GDP is only half the size of the U.S. economy. China knows from its experience that the best way to lift people out of poverty is through economic growth. After Chairman Mao died with his brand of communism, growth policies of subsequent Chinese leaders led to over 500 million Chinese escaping poverty.
- Here are the NAR GDP forecast figures in detail. (PDF)
Third quarter economic activity grew at 2.0 percent, which is decent but still subpar compared to the historical norm. Gross Domestic Product (GDP) generally grows by three percent on average and should be growing closer to four to five percent after a recession in order to compensate for the losses during the recession. So no one is happily cheering the latest figures.
I participate in the Blue Chip Consensus forecast with around 50 other economists representing organizations such as FedEx, Dupont, Ford Motors, the U.S. Chamber of Commerce, Wells Fargo, Bank of Tokyo, Swiss Re, and UCLA. This forecast is often mentioned by the Congressional Budget Office, Administrations, and various politicians to say that their outlook is (or was) not too much different from the private sector forecasts.
Forecasting can be a hazardous sport at times. Interestingly though, this Blue Chip average consensus forecast value generally tends to be more accurate than any individual economist’s forecast over the long run. That is to say, it is better trust the consensus forecast more so than an individual economist’s forecast.
So, what is the Blue Chip consensus saying about the bottoming of home values? In the latest January issue, a solid majority of economists said the Case-Shiller home price index will finally bottom in 2012.
The exact phrasing of the question and the response tally are below:
Technically, if counting the small decimal point, the price may in fact bottom out in 2012. But as the graph below shows, for all practical purposes it looks as if home prices started to stabilize from 2009 onward. Of course, there will be local market differences (with markets like Washington, D.C. showing price gains while Las Vegas is showing price declines). It is therefore not surprising that mortgage loans originating from 2009 on show exceptionally low default rates.
Released yesterday, December 29th, 2011, here is the 2012 Economic and Housing Outlook from NAR Chief Economist Lawrence Yun. The full 15 slide PowerPoint looks at economic indicators such as existing home sales, new home sales, housing starts, GDP, payroll jobs and more.
The Summary Forecast Table is also pasted below.
NAR publishes forecasts each month based on the inflow of updated economic data. Here are the latest take-aways regarding the outlook for next year:
- No economic recession in sight. The GDP is expected to rise 2.5 percent in 2012. That is, the income of everyone combined in the U.S. will rise by 2.5 percent.
- The net job creation is expected to be 1.5 to 2 million. The national unemployment rate will slide to 8.4 percent by this time next year.
- The baseline forecast for existing home sales is a rise of 5 percent, while home prices will finally turn positive, albeit by only 2 percent. The total industry commission revenue, therefore, can be expected to rise by around 7 percent.
- New home sales will rise by 16 percent. A stronger comeback is in the cards, after brutal declines during the housing bust years.