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October 30, 2006
Bottoming Out? Part 4
From today's Wall Street Journal (page A2 in the print edition):
The maximum impact of falling home construction may have hit the U.S. economy in the third quarter, some economists say. But that doesn't mean the housing market is on the verge of a miracle recovery. Construction is expected to fall further as builders struggle to shed a glut of unsold homes. And many economists expect house and condominium prices to continue falling for at least an additional six months to a year in parts of the nation where speculators went wild.
For now, the consensus among economists is that the housing downturn will remain a drag on the economy but probably won't sink the U.S. into a recession next year.
Offsetting the housing damage are several positives. Gasoline prices and mortgage interest rates have fallen in recent months. The stock-market rally has made some people feel richer, even as those who trust only in real estate feel poorer. And job growth, though unspectacular, continues at a "solid" pace, says Scott Anderson, an economist at Wells Fargo in Minneapolis.
With home prices flat to lower in much of the country, Americans already have less ability to tap their home equity to finance spending. But it is unclear how much effect that will have on consumer spending.
Some of the optimists' arguments are dubious. To bolster its position that the housing market is stabilizing, the National Association of Realtors last week trumpeted a 2.4% decline during September in the number of previously occupied homes offered for sale through multiple-listing services. But the Realtors' news release didn't mention that listings almost always decline in September, when the back-to-school season means fewer people are moving. Over the past 20 years, listings have declined an average of 3.4% in September, says Ivy Zelman, a Cleveland-based housing analyst for Credit Suisse.
In addition, and with a hat tip to University of Chicago XP-77er Ken Sutton, there is this to think about, from Bloomberg:
An unexpected increase in auto production last quarter was a statistical fluke that will be reversed, making current U.S. economic growth even weaker, according to a former Commerce Department economist.
Last quarter's annualized 26 percent increase in motor vehicle production shocked Joe Carson, now director of economic research at AllianceBernstein LP in New York. Without the gain, the economy would have grown at an annual rate of 0.9 percent, not the 1.6 percent the Commerce Department reported today.
The reported increase in output came despite cutbacks announced by General Motors Corp., Ford Motor Co. and others. A drop in the wholesale price of SUVs and light trucks as the automakers cleared leftover 2006 models made production look stronger than it actually was, said Carson. The economic fallout from the auto-industry cutbacks will instead come this quarter, he said.
"Last quarter was weak even with the benefit of this mismatch and the fourth quarter will now also be weak because it's going the other way,'' Carson said.
Even an optimist would have to admit that the fourth quarter begins with a few pretty big challenges.
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