Friday, November 18, 2016

2016 in Review: Continued Recovery from The Great Recession

At this same time a year ago, I wrote about a housing rebound that had continued its slow yet gradual climb back to normal.  The good news has continued in 2016, so much so that it’s widely expected for the Federal Reserve to hike its benchmark interest rate by the end of the year.

U.S. GDP -- which had hovered closer to 1.0 percent during the previous three quarters ---- surged to 2.9 percent in the third quarter, due mostly to rising inventory of goods, higher exports, and more federal government spending.

Job growth, which rose by 161,000 in October, has averaged 181,000 per month throughout 2016. Although this is down 21 percent from 2015’s average level, it is still more than enough to keep up with population growth and continue putting downward pressure on the official unemployment rate.

Nonetheless, there is an important caveat here to consider: Although a 4.9 percent unemployment rate implies that the economy is more or less at full employment, by also including discouraged workers, the under-employed and those persons marginally attached to the workforce, the unofficial unemployment rate rises to 9.5 percent – or exactly matching what it was in October 2015.

This higher unemployment rate is also why wages had been stubbornly flat during this long economic recovery, although over the last 12 months they did rise by 2.8 percent, thus giving workers a slight edge over inflation.

Speaking of inflation, after years of it remaining flat or even dipping into deflationary territory, it’s now returning, which is why higher interest rates are on the short-term horizon.  For the 12-month period ending in October, the Consumer Price Index rose 1.6 percent, and by 2.1 percent when subtracting out more volatile indices for energy and food.  Even the supply-side Producer Price Index rose by 1.6 percent during the same time period, which is a big jump from a year ago, when it was less than 0.5 percent per year.

Confidence is trending higher, with the University of Michigan’s Consumer Sentiment Survey edging up to 91.6 in its preliminary November reading – up 5.0 percent from October and 0.3 percent from a year ago. At the same time, builder confidence has remained at well over 60 for three consecutive months (anything over 50 is positive), and is approaching 70 for single-family home sales now as well as over the next six months.

Supporting this confidence was a surge in housing starts in October to a nine-year high, up by over 25 percent from the previous month and over 23 percent year-over-year to an annual rate of 1.3 million. Although October building permits rose by much smaller amounts, the annual rate of 1.2 million demonstrates that the strength in starts is likely to continue.

Still, given tight levels of supply in most markets, affordability remains a concern, with 61.4 percent of families earning the median income able to afford the median-priced home at prevailing interest rates in the third quarter of 2016. While this rating from the Wells Fargo Housing Opportunity Index is down sharply from the last high of 77.5 noted in the first quarter of 2012, it remains far above the previous trough of 40.4 set in the third quarter of 2006.

Single-family new home sales, which dipped in August, rebounded by over three percent in September to 593,000 per year, and were up by nearly 30 percent year-over-year. So far in 2016, new home sales have averaged 564,000 per month. At current sales rates, existing inventory would take 4.8 months to sell, down a full month from a year ago.

For existing homes, sales also rebounded 3.2 percent in September to 5.47 million per year, but are up just 0.6 percent year-over-year. Much of this increase was due to the share of first-time buyers reaching 34 percent, for the highest rate seen in over four years. Although September inventory rose slightly to just over two million homes – or a timeline of 4.5 months -- it has fallen year-over-year for 16 consecutive months.

Looking ahead to 2017, pre-election forecasts had suggested a GDP growth rate of two percent. Meanwhile, the NAHB is calling for single-family starts to rise by 12 percent, multi-family starts to decline by two percent after a strong showing in recent years, and remodeling activity to surge by 23 percent. For all non-residential projects, Associated Builders and Contractors (ABC) is forecasting growth of three percent, with commercial projects rising by over eight percent and industrial projects shrinking four percent.