ECONOMIC OUTLOOK Over twenty years of proven expertise and trend analysis in evaluating residential property values. |
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To help our customers better understand current market conditions and projections, Local Market Monitor provides periodic analyses of national economic trends and their impact on real estate markets. This analysis, developed by Ingo Winzer, reflects his view on the current outlook for the national economy. National Economic OutlookSeptember 17, 2007 The national economy continues to slow, particularly the core of consumer spending that accounts for seventy percent of GDP. Consumer spending is affected by income, debt, wealth, and fears about the future, and these have seen negative developments in recent months. GDP grew at a 4 percent annual rate in the second quarter, a good recovery from the anemic 0.6 percent rate of the first quarter, but a closer look at the components of growth is not encouraging. Consumer spending grew at just a 1.4 percent rate, almost the lowest in the last five years. Most of the increase in GDP came from commercial construction, higher exports (a cheaper dollar), lower imports (less consumer interest), and an increase in defense spending (Iraq). Worrisome for consumer spending in the longer term, the number of jobs in August was up just 1.1 percent from last year, the lowest growth in four years. Manufacturing jobs decreased 1.4 percent. Low job growth means low income and spending growth. And if the unemployment rate increases much above the 4.6 percent rate of August, consumers will fear for their own jobs and cut back on non-essentials. Consumers continue to be in debt up to their eyeballs. Homeowners need a record 18 percent of their disposable income to make mortgage and credit card payments. The amount of debt is both a cause and a consequence of changes in home prices. When home prices increase, consumers feel wealthier and are willing to take on more debt, even very large mortgages. But stagnant or declining home prices produce the opposite effect, which is why the current housing slowdown will affect consumer spending for several years. In July, the number of permits for new home construction was down 17 percent from a year ago. Quite aside from whether consumers want more debt, lenders aren't likely to let them have it, now that delinquencies are increasing. The major economic effect of the sub-prime mortgage debacle is the tightening of credit for ordinary consumers, not the losses suffered by wealthy owners of highly-leveraged hedge funds. Delinquency rates for mortgages held by big banks increased to 2.35 percent in the second quarter, up from 1.61 percent a year ago and the highest level in five years. Delinquency rates on credit card debt also increased but not as dramatically, and delinquencies on commercial loans remain low. ARCHIVED OUTLOOKS
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