We thought we'd collect the national economic data into a single
post here as we approach the end of the year and look at the news in
the context of potential impact on the housing market.
Housing
Starts (reported yesterday): The Commerce Department published November
housing starts and building permits that showed an up-tick in November
versus an October down-tick. The rose-colored-glasses crowd see this as
evidence that there is no problem in the housing market. The bubble
crowd says we're building too much despite rising interest rates,
someone is going to drive this train into the wall at full speed.
Ironically, the November number may be merely a factor of an
unseasonably warm month in much of the country.
GDP
Growth (reported today): 3Q growth was strong at 4.1% (after the final
revisions). Overall, today's report merely confirms an economy humming
along in the summer.
So this, as we like to say, covers old news, what about 2006?
Inflation:
Last week November consumer price index was a little better than
expected. Yesterday producer price index was better than expected
falling 0.7% vs. expectations of 0.5%. Gas prices are way down, so
that's a big factor here. There is evidence of inflation pressures in
the "pipeline" as they say. But for now, things appear to be held
mildly at bay.
Leading indicators for 2006 generally point to moderate growth, certainly not recession in the next 12 months. The folks at ECRI
publish weekly leading indicators (subscription required) that boast
high accuracy of forecasting the business cycle. Their current outlook
is for "moderating growth."
In addition, Nouriel Roubini at RGE Monitor has a 2006 outlook conference call posted today.
His view is there are a number of risks that discount current evidence
of economic strength carrying into the new year. Primarily current
account (trade) imbalances (will continue grow in 2006), federal
deficits show no sign of slowing. Foreign investors have been financing
these deficits by investing in the US, but the bearish take (as
expressed by Roubini and guys like Barry Ritholz) is that there is a
meaningful risk that foreign investors start to be weary, which leads
to a weaker US dollar and higher (perhaps sharply higher) long term
rates. The long term rates (not the Fed of course), determine mortgage
rates. The suddenness of this rate change may determine whether a
housing bubble pops or whether it merely flatten.
Other risks include another oil shock, China and Middle East Political instability, continued weakness in Japan and EU.
Interestingly,
Roubini begins his call today describing the housing bubble among other
global asset bubble conditions. But as he continues further, he
describes the housing market as likely to "flatten" but he doesn't
forecast a pop. Why? His take seems to be that the combination of these
risks will likely lead to lower growth (2% rather than 4%) but not
outright recession. That is, we'll see the continuation of the
softening factors for housing, but he doesn't expect the deep cuts that
would cause a big slide in housing prices.
Some researchers, GaveKal for example (here's a link via John Mauldin
registration required), suggest that structural changes in global
economic conditions will continue to keep foreign investment strong in
the US and thus long term interest rates low, for the foreseeable
future. I sincerely like the analysis, but man it's hard to accept the "it's different this time" argument.
In
summary, There is little evidence the macro economy has remained strong
through the year. However, there appear to be few forecasts that
indicate the goldilocks conditions for US real estate will continue in
2006. Finally, there are few deep analyses that indicate a bubble pop
that looks anything like the NASDAQ bubble in 2000. Not surprising, I
guess, that the forecasters would forecast a middle ground.
