Economic Commentaries

Entries for August 2012

06

In recent weeks we revised our range for GDP growth from 1.5%-2.0% to 1% - 2% annually. It appears that growth in the spring quarter will be at the lower end of this range. We always thought the earlier consensus expectation of 2% -2.5% growth was too optimistic, and similarly we think a recession forecast at this juncture is too premature. However, in our view the risks continue to be on the downside and the prospect of an outright decline in business activity is a toss-up.

Guarded optimism is warranted for three reasons in our view. First, it appears that a nascent recovery in residential construction is building some momentum. Homebuilder confidence rose sharply in June as did buyer traffic. And this was during a month when the weather was very hot and consumer confidence was very cold.

Affordability, evidence of home price stability, rising rents, and an improving supply-demand balance are key drivers. Housing starts rose nicely in the spring quarter and residential construction is becoming a key contributor to the paltry economic growth that exists. In line with this, while June was the weakest month of the spring quarter for the overall economy, real earnings actually rose. This was because of declining inflation and not wage increases, but you take whatever you can get. The rise in real earnings was complemented by a rise in the saving rate, so the hope is that these can buffer consumption in coming months. Maybe the back to school selling season will be better than expected.

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