Last week, the U.S. Bureau of Economic Analysis updated GDP growth from 1.6 percent to 2.1 percent for the fourth quarter. Despite this increase, the gain for last year as a whole was 1.6 percent, the lowest growth rate since the 2008-09 recession.
Since the end of the recession in 2009, the economy has grown at 2.1 percent per year. In comparison, the economy grew at an annual average of 3.3 percent in the 30 years before the recession—over 50 percent faster than during the last seven years.
The Dow Jones industrial average rose from 13,265 in 2007 to 19,763 at the end of last year, a gain of 49 percent over the last decade. This is much higher than the increase in the total output of the economy, which grew by 28 percent over the same period. And this doesn’t count the additional gains in the stock markets we’ve seen over the first quarter of this year. This suggests that unless the economy revives strongly in the near future, the stock market indexes should return to values more in line with the underlying economy.
The GDP growth mentioned above refers to the last quarter of 2016; we won’t know results for the quarter just ended until the end of April. Meanwhile we have other data suggesting the first quarter has been improving—at least from a consumer opinion viewpoint. There are two well-known indexes that report consumers’ views regarding their finances, as well as the overall economy: The Conference Board’s Consumer Confidence Index and the University of Michigan’s Index of Consumer Sentiment. Both indexes, displayed in the table below, increased in March, suggesting that consumers are feeling better about the U.S. economy and their own future prospects.
to the actual gains in March, we see that The Conference Board’s index rose sharply. The University of Michigan’s index remained relatively flat in March, increasing by less than 1 percent (+0.8 percent), while The Conference Board’s jumped 8.2 percent. Why such a large difference?
We believe that one of the reasons lies in the time period covered in the surveys. Although both studies reflect consumer interviews conducted during the month, the timing of the responses differs between the two surveys. The Conference Board mails its surveys on the first of the month and processes the data by the middle of the month; so in reality, they reflect consumers’ views during the first half of the month. The University of Michigan, by contrast, spreads its interviews throughout the month, balancing the opinion of consumers between the first and second half.
This mixed view of the economy is captured by our Economic Indicators Dashboard, showing a favorable view for only four of the eight indicators.
Mortgage rates eased further last week. The 30-year fixed rate, depicted in the chart below, fell by another nine basis points to 4.14. Although the drop would have an imperceptible impact in the residential markets, any factor that makes it easier and more affordable for consumers to purchase a home is welcome.
Federal Reserve Board, including Chairman Yellen, have indicated that they will probably raise rates three more times this year, the impact on mortgage rates will depend on the size of these increases. If they raise it a quarter of a percentage point each time, we’ll be seeing the fed funds rate at 1.75 to 2.00 percent. This may cause mortgage rates to rise to a similar extent. But the Fed’s decisions are based on the assumption of a reviving economy, which suggests that employment and household incomes will also rise. Rising incomes would enable more households to absorb the impact of higher mortgage rates.
Manuel Gutierrez, Consulting Economist to NKBA, economist@nkba.org
Explanation of NKBA’s Economic Indicators Dashboard
The dashboard displays the latest value of each economic indicator. Note that all the data, except for “mortgage rate” and “appliance store sales” are seasonally adjusted and are represented at annual rates.
Remodeling Expenditures. This is the amount of money spent on home improvement projects during the month in question. It covers all work done for privately-owned homes (excludes rentals, etc.). The data are in billions of dollars and are issued monthly by the U.S. Department of Commerce.
Single Family Starts. It is the number of single family houses for which construction was started in the given month. The data are in thousands of houses and are issued monthly by the U.S. Department of Commerce.
Existing Home Sales. These data are issued monthly by the National Association of Realtors, and capture the number of existing homes that were sold in the previous month.
High-End Home Sales. This series represents sales of new homes priced at $750,000 and over. The data are released quarterly by the U.S. Department of Commerce, and are not seasonally adjusted. Thus a valid comparison is made to the same quarter of prior year.
Mortgage Rate. We have chosen the rate on 30-year conventional loans that is issued by the Federal Home Loan Mortgage Corporation (known popularly as Freddie Mac.) Although there are a large number of mortgage instruments available to consumers, this one is still the most commonly used.
Employees in Residential Remodeling. This indicator denotes the number of individuals employed in construction firms that do mostly residential remodeling work.
Building Materials Sales. These data, released monthly by the Department of Commerce, capture the total sales of building materials, regardless of whether consumers or contractors purchased them. However, we should caution that the data also include sales to projects other than residential houses.
Appliance Store Sales. This driver captures the monthly sales of stores that sell mostly household appliances; the data are stated at an annual rate. We should not confuse this driver with total appliance sales, since they are sold by other types of stores such as Home Centers.
We hope that you find this dashboard useful as a general guide to the state of our industry. Please contact us if you would like to see further detail.
