Hurricanes, terrorism, budget deficits, and any number of other threats haven’t pulled the U.S. economy off track. And if recent momentum is any indication, continued if moderate growth looks like the path of least resistance for the foreseeable future.
Yesterday’s release of the Conference Board’s leading index for October says as much. Seven of the ten indicators that comprise the leading index increased last month, the Conference Board reports, which boosted the gauge by a robust 0.9%.
Impressive, but for how long? David Resler, chief economist at Nomura Securities in New York, wrote yesterday that while the October bounce was dramatic, it’s probably a one-time event. “The nine-tenths increase in leading indicators was propelled by the drop in initial claims–the chain reaction from Hurricane Katrina–that will not be long lasting,” he wrote in a note to clients on Monday.
Yes, some of the rise can be attributed to a rebound from the stumble in September, which suffered the effects of Hurricane Katrina. But a rebound’s a rebound, and it’s clear that worries that the hurricane would trigger a national recession have turned out to be a big wind. As Resler concludes, “Moderate growth is still the most likely economic course despite this oversized increase.”
A survey of economists released today echoes the point. “Our forecasters expect strong real GDP growth of 3.3% next year…” said Carl Tannenbaum, vice president of National Association for Business Economics in a press release accompanying the NABE’s November outlook. The economists polled also raised their full-year 2005 GDP prediction slightly to 3.6% from the 3.5% in the September survey.
Okay, so there’s a fair amount of optimism on the economic outlook. Nothing stellar, but respectable just the same. In fact, the current economic expansion is now four years old, based on the National Bureau of Economic Research’s data that dates the end of previous recession as November 2001.
With dismal scientists saying the train will keep rolling, we wonder what might possibly threaten a derailment? Housing seems a likely candidate for causing trouble. Indeed, it’s widely thought that the Federal Reserve is raising interest rates until and if the housing market cries “uncle.” When that cry emerges in no uncertain terms, goes this line of thinking, the Fed will cease and desist in its quest to tighten the monetary strings. At that point, the central bank’s job will be done, namely, injecting a fresh dose of humble pie into the real estate sector.
Are we getting close to a turning point for real estate? It’s easy to find economists who think so. One example: “We are seeing some anecdotal signs that the housing market is cooling off and that could be a damper on economic growth in the year ahead,” Greg Thayer, chief economist for A.G. Edwards and Sons, told Reuters yesterday. But let’s not get ahead of ourselves, he added, preferring to hedge his forecast by noting that “the positives are still outweighing the negatives in today’s [Conference Board] report.”
Nonetheless, the guessing game of what will constitute the Fed’s definition of crying “uncle” for the real estate market promises to be new new thing in central bank watching going into 2006. Arguably, the beginning of the end in the great real estate boom has already arrived, or so the October housing data suggests. U.S. housing starts dropped 5.6% last month vs. September while building permits dropped in October by the most in six years, the Commerce Department reported.
“The supply of new homes for sale, relative to the pace of sales, has been rising for well over a year, and builders are now reacting by slowing the pace of new construction,” Ian Shepherdson, chief U.S. economist at High Frequency Economics, told Bloomberg News last week. And in the end, cyclical turning points, whether it’s money supply, real estate or a national economy, are all about supply and demand.
Nonetheless, despite the mounting signs that real estate is cooling, some in the industry remain optimistic that housing’s not about to suffer any massive drop any time soon. “This cooling down period should extend into 2006 but not lead to a major contraction in the housing markets,” David Seiders, chief economist of the National Association of Home Builders, told RISMedia.com yesterday. “NAHB’s forecast shows a 5.5% decline in housing starts for 2006, basically retracting the increase expected for this year.”
The question, of course, is what repercussions a softening housing market will have on the U.S. economy. Real estate has been booming for so long, and in such dramatic fashion so that it’s boosted consumer confidence and household assets. The Fed seems intent on taking away this particular punch bowl. Finding out what that means exactly is on track to be the great question for 2006. And just to keep things that much more complicated, the new man who’ll soon be installed at the central banking helm, Ben Bernanke, is untested.