Freddie Mac Sees Strengthening Economy
|April 11, 2002
The latest economic indicators point toward a strengthening economy. First-quarter GDP growth is likely to come in at a 3% (or better) pace. Following the latest upward revision to the fourth quarter growth rate to 1.7% -- based on the strength of consumer and government military expenditures -- the recovery may have begun at the start of the year, or perhaps even the end of last. If so, that would be the shortest and mildest recession of the 32 downturns that the U.S. has been in over the past 150 years.
Concern has surrounded the ability of consumer spending to contribute to this year's expansion. However, consumers don't appear concerned. Supported by the strength of personal income growth, consumer spending was up the first two months of the year. Car and light truck sales have remained strong during the first quarter, and home sales and construction have been off the charts. In January, sales of new and existing homes burst through the old record with 6.9 million sales (SAAR), and only slipped to 6.8 million in February. Housing starts jumped to 1.8 million (SAAR) in February, the highest in three years. Even Consumer Confidence was back to almost where it was last August.
Another concern has been the recent pickup in energy prices. Wholesale gasoline prices jumped 4.5% in February and will show up in the March CPI. Nonetheless, CPI "core" inflation (excluding the volatile food and energy components) has continued to be low, growing at a 3% annual rate the first two months of the year. With energy prices having since retreated, the outlook remains generally very good for a continuation of low inflation. The Fed may begin to increase short-term interest rates before mid-year to forestall any further inflationary stimulus.
- We have revised upward our projection of economic growth for 2002 based on the strength in recent economic indicators. Real GDP is forecast to expand 3.0% in the first quarter and 3.4% for the year.
- Inflation will remain low, with price increases of 2.2% this year and a longer-term trend of 2.5% annually.
- The unemployment rate edged up to 5.7% in March but may begin to gradually ease lower. For 2002, the rate is forecast to average 5.5%, declining to 5.0% in 2003.
- With low inflation expected, long-term interest rates should also remain low. Thirty-year fixed-rate mortgages have hovered within a narrow 0.5% band centered at 7% since mid-November, and this pattern should continue. The rate on conforming loans is expected to average 7.1% for 2002.
- Housing starts have remained vibrant, hitting 1.77 million (SAAR) in February. The exceptionally good weather conditions in much of the U.S. contributed to the construction pace, and March starts should come in lower. For the year, starts are forecast at 1.63 million, 2% more than in 2001.
- Likewise, a sales pace of close to 7 million for one-family houses, as indicated in the January and February data, cannot be sustained. Sales should slip down toward a 6 million (SAAR) pace and come in close to 2001's record level of 6.2 million sales.
- House price appreciation slowed dramatically in the fourth quarter, but an upward revision in appreciation (as measured by Freddie Mac's Conventional Mortgage Home Price Index) is likely - much of the initial estimate is based on home purchase contracts signed in September and October, and home values are likely to have firmed subsequently. Look for appreciation of 3% for 2002.
- Single-family mortgage originations will be about 20% lower in 2002 because of an anticipated drop in refinancing, coming in around $1.5 trillion in new production. Refinancing will slow because mortgage rates are likely to inch a bit higher in the second half of the year (especially for ARMs as the Fed pushes the Federal Funds rate up) and because the bulk of families with a financial incentive to refinance will have done so by mid-year. The ARM share of originations will continue to remain low, averaging 18% in 2002.
Source: Freddie Mac