NAHB Chief Economist
A recovery from the Great Recession was never expected to be swift or strong, but recent economic weakness has raised questions about the recovery’s sustainability. Former Federal Reserve Chairman Alan Greenspan, a man of few words, described the situation as “an invisible wall, which we have run into here. This essentially is a typical pause that occurs in an economic recovery.”
The recovery is not being pulled along by housing, and other components of growth are becoming more fragile as consumers worry about credit and jobs. However, the basic recovery path remains positive even if slightly less robust than before oil started seeping into the Gulf of Mexico and Europe decided to pull back from its expansionary efforts.
The June employment report ignited concern when non-farm payroll employment was reported down by 125,000 jobs at a seasonally adjusted annual rate, following a 431,000 increase in May. But both the May and June numbers were distorted by Census Bureau hirings and firings, which were up 411,000 in May and down 225,000 in June.
More importantly but still disappointing, the private sector added 33,000 jobs in May and 83,000 in June. Although these were hardly robust numbers, June showed the sixth consecutive month of private job gains.
During those six months, however, private temporary workers, who comprise less than 2% of private sector jobs, accounted for almost a third of the job gains, indicating that businesses are still hedging their bets, uncertain about the recovery and, in particular, how long the growing demand for their products and services will last. If demand is sustained — as NAHB is forecasting — many of the temporary positions in the private sector will become permanent.
The one apparent bright spot in the employment report — the decline in the unemployment rate from 9.7% in May to 9.5% in June — was actually a negative since it was not due to employment rising but job seekers choosing to leave the labor force, presumably because they considered their job prospects dismal.
NAHB is projecting that the unemployment rate will be around the current 9.5% by the end of the year based on the assumption that there will be sufficient net job creation to absorb the increase in the labor force as more workers return in search of employment.
Employment stability and job growth are keys to a housing recovery. In addition to alleviating workers’ fears about losing their next paycheck, improving employment measures help boost the confidence of households that are considering buying a home.
Residential construction continues to shed jobs, albeit at a slower rate than a year ago. In June, 6,100 jobs were lost, down from the 36,900 job losses a year earlier and from the 81,700 residential construction jobs lost in November 2008.
Total construction employment — including non-residential jobs — fell 22,000 in June, down from a loss of 30,000 in May. The overall unemployment rate for construction jumped to 23.7% in June from 20.6% the month before, reflecting the problems both residential and non-residential construction continue to face.
While the May employment report along with weak housing numbers increased speculation over a potential “double dip” in economic activity, several factors favor the continuation of modest growth.
First, states have been slower than expected in distributing the $787 billion American Recovery and Reinvestment Act funds, which could also explain some of the current softness. The longer lasting impact will support growth later this year.
Second, consumption has been contributing about half of what it would normally contribute to economic growth, but disposable personal income has been moving up and we expect this to continue. Avoiding a double dip depends on this, along with improvements in household balance sheets that took very heavy hits during the Great Recession.
Also, the Federal Reserve’s household balance sheet estimates for the first quarter of this year show the fourth consecutive advance in household net worth. The gain was due primarily to advances in the stock market and paying down debt, mainly home mortgages and consumer credit.
We expect household wealth to trend up gradually over the balance of the 2010-2011 period. Consumers’ debt burdens have been improving since the end of 2008 and are at levels last seen at the end of 2000.
Third, productivity has increased for eight quarters as companies reduced their labor force more than output. Permanent hiring will have to occur to keep output ahead of demand as businesses reach an end to productivity gains. On the housing front, with inventories of single-family houses at a 40-year low, any increase in demand will require new building.
Difficulty in obtaining business and consumer credit has remained a significant drag, but there have been some minor signs that this may be turning around. Non-revolving credit from commercial banks — which excludes credit card debt and mortgages but includes auto loans — has risen in four of the last five months.
With bank balance sheets in better shape, it is likely there will be a slow improvement in credit availability over the coming months.
The combination of the now expired home buyer tax credit, historically low interest rates and the improving employment picture has propelled single-family construction forward over the past 12 months as measured by the value of construction put in place.
Although the value of single-family construction only rose 0.8% at a seasonally adjusted annual rate in May, it was still up 32.1% from a year earlier — when construction activity was at an extremely low level. With builders working hard to complete single-family houses in time to qualify for the June closing for the tax credit, single-family construction spending can be counted on to contribute to growth in June.
However, multifamily construction spending continued its slowdown in May, falling 6.3% from April and plummeting 57.7% from a year earlier, reflecting the cumulative effects of the lack of financing for new projects and the gradual tapering off of multifamily construction starts since fall 2009.
May starts and permit numbers were up and if that improvement continues, the value of multifamily construction put in place will be on an upward trajectory in the next few months.
It was no surprise that the National Association of Realtors’ Pending Home Sales Index fell sharply in May. The index is based on the signing of contracts, as opposed to the Realtors’ existing home sales numbers, which are based on settlement of those contracts.
May, therefore, marked the first month following the deadline for qualifying for the home buyer tax credit. The index fell 30.0% from April at a seasonally adjusted annual rate, and was down 15.9% from a year earlier.
As with new home sales, existing home sales were undoubtedly pulled forward into earlier months by buyers seeking to qualify for the tax credit, reducing sales in close-in, post-tax credit months. The true picture of the underlying market will not emerge until July or August.
Both the 10-city and 20-city S&P/Case-Shiller composite price indices rose in April. The 10-city index was up for its 11th consecutive month, while the 20-city index was pulling out of two months of decline on the heels of eight months of increases. Both indexes are up on a year-over-year basis — by 4.6% and 3.8%, respectively.
Prices for 11 of the 20 cities were up from a year earlier, and 10 of those 11 were up by more than 3%. Three of the nine that fell — Washington, D.C., New York City and Portland, Ore. — were down by 1% or less.
Meanwhile, the Federal Housing Finance Agency (FHFA) price index was also up in April. However, it was down 1.5% on a year-over-year basis. Prices in six of the nine Census divisions rose in April over March.
At minimum, the home buyer tax credit appears to have helped stabilize home prices and may have given them a bit of a lift. With no help from the tax credit, the next few months will provide the true test for home prices.NAHB is forecasting that house prices will exhibit a mild upward bias for the remainder of this year and throughout next year.