U.S. Economic Forecast: The Terrible Twos

Recent data suggest the U.S. economy has rebounded fairly well from its contraction in the first quarter of the year, giving financial-market participants, as well as American businesses and consumers, reason to be somewhat optimistic. Job gains accelerated after a lull in March, and housing activity strengthened after a deep winter chill. Also, at long last, households are spending some of their now-rising wages and the money they’ve saved at the gas pumps.

In this light, we have raised our forecast for second-quarter U.S. GDP growth to 2.8%, from 2.1% in May. The Bloomberg June survey of consensus forecasts had second-quarter growth at 2.5%.

But while markets may have breathed a sigh of relief, there’s a lingering feeling that the first quarter’s contraction represents more than a mere blip. In fact, a number of indicators suggest U.S. growth will toddle along at best. In this light, we now expect full-year U.S. GDP growth of 2.3%, down from 2.4% in our May forecast and below last year’s economic expansion of 2.4%. Worse yet, we don’t expect the world’s biggest economy to outgrow these “terrible twos” any time soon.

To be sure, much of the economy has warmed up, concurrent with the weather. And it’s not just jobs data that suggest the ongoing recovery remains on track. Consumers have hit the malls and bought big-ticket items such as cars, and even the housing market has shown signs of renewed strength. Additionally, businesses seem more optimistic about economic conditions, with most manufacturing sentiment readings climbing further into positive territory.

However, although the domestic side of the economic equation seems to be rumbling along–with temporary factors such as the weather, West Coast port disruptions, and the so-called residual seasonality dissipating–the drag from still-low oil prices and the strong dollar, which has weighed on capital spending and production, may still do some damage. And, of course, businesses will need to unwind their inventory accumulation in the first quarter, which will damp spending.

Even with a second-half rebound, 2015 won’t likely be the year the U.S. economy enjoys the level of expansion that typically follows recessions. Although we expect some pickup in 2016, we see GDP growth remaining below 3% through the end of the decade. Our reasons for holding this view are similar to concerns that the International Monetary Fund and the Congressional Budget Office raised last year–to wit, the effects of an aging population on the economy and the prospect of only modest productivity growth.

Whether the U.S. enters into what former Secretary of the Treasury Lawrence Summers has called “secular stagnation”–a period of slow growth, marked by only marginal increases in the size of the workforce and small gains in productivity–remains to be seen. And while specific causes of secular stagnation are difficult to determine, a slower-growing and aging population, greater globalization, and increasingly unequal distribution of income and wealth are generally recognized as contributing factors.

Either way, we’ve yet to even approach the level of post-recession economic expansion that we’ve historically seen. When you consider that the 2.2% average annual growth (2010-2014) we’ve had since the recovery started is only about half the 4.6% five-year average following U.S. recessions (going back 50 years), the recent underperformance is especially notable.

Nonetheless, we think the Federal Reserve will soon raise benchmark interest rates–for the first time in almost a decade. The apprehension that Federal Open Market Committee (FOMC) members showed at their April meeting has eased, and we expect policymakers to lift the federal funds rate twice this year, starting in September–with the target rate rising to 0.5%-0.75% by year-end. However, the central bank is certainly well aware that, while the economy continues to strengthen, there are reasons to take baby steps in normalizing monetary policy. We now expect the fed funds rate to be 1.5%-1.75% by the end of 2016.

Click here to read the full economic update.

Upbeat Housing Reports

Two recent data points – existing home sales and mortgage debt outstanding – point to continued strength in the housing recovery.

May total existing home sales, including single family homes, town houses and condominiums, were 5.35 million, up 5.1% and the highest figure since November 2009. Sales of single family homes were 4.73 million, 5.6% higher than April and 9.7% above a year earlier. Inventories crept up slight and months supply was 5.1.  While existing homes continue recent gains, sales of new homes picked up in April. Together these figures point to further gains in the summer months. New Home sales for May will be reported on tomorrow, June 23rd.  The first chart shows sales of existing single family homes.

Prices have also been advancing. The S&P/Case-Shiller National Home Price index was up 4.1% in the 12 months to March, extending a pattern of gains 35 consecutive months.  Median sales prices reported by the National Association of Realtors show gains as well.

Growth in mortgage debt outstanding has been on a long roller coaster ride, peaking in 2003 and then beginning a long slide into negative territory in 2006. In the last two quarters, growth has barley turned positive.  The peak level of outstanding mortgage debt was $10.69 trillion in the first quarter of 2008; the low point since then was $9.37 trillion in last year’s second quarter. Neither mortgage debt nor national home prices are about to surpass the bubble peaks, but they are headed in the right direction.  The second chart shows year-over-year growth in residential mortgages.

National Consumer Credit Default Rates Reach New Lows in May 2015 According to the S&P/Experian Consumer Credit Default Indices

S&P Dow Jones Indices released the latest results for the S&P/Experian Consumer Credit Default Indices. Data is through May 2015.

S&P/Experian Consumer Credit Default Indices Press Release – June 2015

U.S. Weekly Economic Roundup: Supporting Our Expectations

Neither the Federal Reserve’s minutes to April’s Federal Open Market Committee meeting nor Chair Janet Yellen’s speech this week gave any clear indication of a time frame for interest rate liftoff. Fed Chair Yellen said an initial rate liftoff this year is “appropriate” if the economy continues to improve as forecast. She expects the subsequent pace of hikes to be gradual, although in keeping with the Fed’s data dependency mantra, the pace of tightening could speed up or slow down. She added, though, that the Fed still hasn’t hit its employment goals just yet, and that should rule out June definitively, and likely July too. Inflation is also expected to be moving up toward the 2% target as the economy strengthens. We continue to think the first rate hike will come in September, especially given April’s core inflation of 1.8%.

The few economic releases this week include:

  • Housing starts grew to an annual rate of 1.135 million in April from a revised 0.944 million (was 0.926 million) in March–a seven-year high.
  • Existing home sales fell by 3.3% to an annualized rate of 5.04 million in April from an upwardly revised 5.21 million (was 5.190 million) in March.
  • The Philadelphia Federal Reserve Index of Manufacturing fell to 6.7 in May from 7.5 in April.
  • U.S. Leading Economic Indicators grew 0.7% in April from a revised 0.4% (was 0.2%) in March.
  • The Consumer Price Index (CPI) in April rose by 0.1% following the previous month’s growth of 0.2%. Excluding food and energy prices, the core CPI rose by 0.3% after increasing by 0.2% in March. Year-over-year core CPI rose 1.8%.
  • Initial jobless claims fell to 274,000 in the week ended May 16 from the previous week’s unrevised level of 264,000. Continuing claims remained unchanged at 2.211 million in the week ended May 9.

Housing Springing Forward

In a sign that homebuilders are feeling more confident and the spring housing surge is here, new housing starts rose by 20.2% in April (from March), bringing the annual rate up to 1.135 million. This is a new high for housing starts since December 2007 and is a big rebound from weather-induced first-quarter weakness. April starts increased by 9.2% from a year ago.

Building permits, which are a leading indicator for future building activity, also point to the U.S. housing sector strengthening. Permits for new home construction were up 10.1% to a 1.143 million pace. The gap between permits and starts narrowed with the unwinding of first-quarter weather distortions despite big gains for both, as starts are more weather-sensitive than permits.

Data from the Northeast and Midwest provide evidence of a big first-quarter weather impact. There were large gains for starts in the Northeast (86% in April and 115% in March) after a huge 59% two-month plunge through February. There were also huge rebounds in the Midwest, with gains of 28% in April and 30% in March after a 39% two-month plunge that was similar to the weather-related decline in 2014. For regions less affected by weather, starts in the West surged 39% after falling 18% in March, while starts in the South fell 2% after a 1% dip in March.

And it wasn’t just the multifamily housing that showed strength. The all-important single-family starts climbed 16.7% to a 733,000 annual rate. This is a welcome sign given that this recovery has been marked by wide differences between the two categories–the multifamily component has climbed back to its prerecession levels while the single-family component still has much to gain. In 2015, single-family starts are up a 14.7% year over year, with multifamily up only 0.5%. Momentum in this category seems to have picked up.

We believe that both the supply and demand conditions are much better now than they were a year ago for single-family home construction. The real dollar volumes of construction and land development loans began to rise year over year in 2014, the first time since 2009. According to the Fed’s Senior Loan Officer Survey, builders have been facing more favorable credit conditions as demand for new construction picks up. Homebuilder confidence is positive overall as builders are benefiting from lower wage pressure and cheaper materials. The price of lumber has been dropping since February. That said, negative pressures in some areas do exist. For example, water cutbacks in California might provide less than previously expected construction in the West, while a slowdown in the energy sector will dampen some of the new construction activity previously expected in the South and Midwest.

Moreover, the stringent regulatory hurdles that first-time homebuyers must clear to qualify for mortgages are expected to be loosened. The labor market picture is also considerably brighter now, and we anticipate that wage growth will pick up this year, and income growth should counterbalance the expected rise in effective mortgage rates. Home prices are still climbing, although the pace of the climb has slowed somewhat.

We expect housing starts to climb to 1.1 million units in 2015 and 1.4 million units in 2016.

And the rise in starts should help increase the supply of new homes to come in the market after completion and take some pressure off lagging housing supply in existing homes. Existing home sales dipped 3.3% in April but remained above the 5 million annualized rate mark. The National Association of Realtors (NAR) viewed the rise in prices of existing homes in the market due to tight inventory (median existing home sale price rose 8.9% year over year) as dampening some of the gains in sale in previous months. The NAR noted that “roughly 40 percent of properties sold last month went at or above asking price, the highest since NAR began tracking this monthly data in December 2012.” Rising prices pose an impediment to sales activity, but we expect house price inflation will slow in the coming months as housing supply rises.

Unsold housing inventory remains a drag on sales activity, representing only 5.3 months at the current sales pace, still low on a historical basis. The average 30-year, conventional, fixed-rate mortgage, meanwhile, fell 10 basis points in the month to 3.67% as rates remain historically low and supportive of activity.

We foresee pent-up demand, rising incomes, and solid underlying fundamentals supporting a gradual housing recovery this year.

Late Spring For Housing

Housing starts surged in April with strong gains in single family homes as well as two to four unit and five or more unit buildings. Construction of single family homes has been lagging in recent years. If the gains are confirmed by next month’s numbers, maybe housing will finally have a late spring season.  Sales of existing homes are back to almost normal levels of about five million sales annually.  Sales of new homes continue to lag.

Prices of existing homes have been rising at about a 4%-5% annual rate in recent months.  Whether will pace can be sustained could be revealed in the next S&P/Case-Shiller Home Price Index release on Tuesday, May 26th at 9 AM.

The charts show recent developments in housing. Click on a chart for a larger image.

National Credit Default Rates Reach Historical Lows in April 2015 According to the S&P/Experian Consumer Credit Default Indices

S&P Dow Jones Indices released the latest results for the S&P/Experian Consumer Credit Default Indices. Data is through April 2015. S&P/Experian Consumer Credit Default Indices Press Release – May 2015

Will Millennials start buying homes?

Perhaps the best reflection of the economic pressures Millennials face can be seen in the U.S. housing market. The pace of household formation and the rate at which Millennials head their own households is declining. In fact, detailed data show that the drop in homeownership during the financial crisis was the largest for people ages 25-29, falling by 21.8% to 32.7% in 2014, from 41.8% in 2006. By way of contrast, the overall drop for the U.S. was just 6.3%. A fair amount of this drop in homeownership could be attributed to foreclosures among Gen-Xers, who themselves were hit hard. However, people ages 25 and younger, largely Millennials, did see homeownership fall by 13% from 2006 to 2014. The sharpness of this decline is exaggerated somewhat by surging homeownership rates among people age 29 and younger during the precrisis housing boom. SPRS_No-homes-for-the-young_Twitter

The downward homeownership trend among Millennials has a number of explanations. Research shows the most common reasons renters cited for renting (rather than owning) a home are the lack of a down payment (45%) and failing to qualify for a mortgage (29%), according to a July 2014 study on the economic well-being of U.S. households by the Fed–while 10% of renters reported that they are looking to purchase a home. This suggests that a large number of renters would prefer to own a home if it were easier, or even possible, for them to do so. This is especially true among renters aged 18-29, who were far more likely than any other age group to indicate that they plan to move in the near future, with nearly half of them saying they can’t afford a down payment.

Millennials also faced tighter bank lending restrictions in the fallout from the financial crisis, keeping new credit and new opportunities even further at bay. About two-thirds of Americans aged 30 and younger have credit scores below 680 (on a scale of 300-850), which is much less common among older age groups (23). Since the financial crisis took hold, young people with student debt have seen their credit scores drop even further, relative to people at the same age with no student debt. Before 2009, people aged 25 with student debt generally had higher credit scores than people the same age without.

In light of these financial difficulties, it’s unsurprising that U.S. Census Bureau data shows that the number of 25- to 34-year-olds living in their parents’ homes jumped 17.5% from 2007-2010. This is similar to Pew Research, which found that 57% of 18- to 24-year-olds lived with their parents in 2012. By way of comparison, in 1960, three out of four women and two out of three men had finished school, left home, were financially independent, had married and had children by age 30.

Meanwhile, the number of 30-year-olds who own their own homes is now roughly equal to those who live with their parents–a sharp contrast to 2003, when a 30-year-old American was twice as likely to own a home as he or she was to live with parents, according to the New York Federal Reserve (24). There’s also a clear correlation between growth in student debt and the rate at which adult offspring live with their parents. For every $10,000 increase in a state’s student debt per graduate, there’s a corresponding 2.9 percentage-point rise in 25-year-olds living with parents (25).

All of this comes as the dollar amount of student loans outstanding in the U.S. has tripled in the past decade, reaching a record $1.2 trillion last year. (See “Growing U.S. Student Debt Could Have Long-Term Credit Implications,” published Aug. 26, 2014.) In fact, student debt was the only type of household borrowing that continued to grow during the recent recession and recovery. And while it’s difficult to draw conclusions about the specific effects this will have, it’s fairly clear that many young Americans are delaying purchases of suburban homes in favor of city rentals or had to move in with their folks, given that home ownership for those under 35 has fallen to about 36% today, from a high of 44% in 2004.

While homeownership rates were once traditionally higher among those with student debt than for those without it, that trend began to reverse during the recent recession. In 2008, homeownership rates were 4% higher for 30-year-olds with a history of student debt than for those without. While homeownership rates have fallen for both groups, the drop has been much steeper for those with a history of student loans: a 10% decline, compared with 5% for those with no history of student debt. For the first time in at least 10 years, 30-year-olds with no history of student loans are more likely to have mortgages than those with a history of student debt, according to the New York Fed (26).

In level terms, new entrants to the market cooled their purchases in January, accounting for 28% of purchases in the month–the lowest share they’ve claimed since June 2014 (also 28%). While January can be volatile because of seasonal conditions, that’s still significantly below the historical average of almost 40%. The slowly healing jobs market, coupled with more reasonable home-price appreciation trends and chances of higher interest rates, may mean first-time buyers could be about to enter the property market at greater rates.

Why millennials and the Depression-era generation are more similar than you think

Both generations grew up amid a major financial crisis, making them less willing to spend and more likely to save. What sets them a part, though, is the burden of student loans.

Millennials have a bad rap. We imagine them spending their days updating social media accounts with headsets covering their ears and their parents’ credit card numbers pre-logged into Amazon Prime accounts.

A nice life if you can get it, but the reality is far different, according to research by Standard & Poor’s. Millennials — those born between the early 1980s through the early 2000s and also known as Generation Y— are shaping up to be a frugal and career-focused generation with the potential to lead a robust and sustainable U.S. economy. We I say potential because they’re not yet the potent economic force that they could be; they are thus far a quiet group, economically conservative and waiting for better conditions to roar to life.

The success or failure of this generation will have widespread economic consequences. Already, millennials spend about $600 billion annually and are on track to spend $1.4 trillion a year by 2020.

According to our research, continued low wages for millennials could reduce U.S. GDP by as much as $244 billion through 2019, or $49 billion a year, relative to our baseline scenario. This suggests that policies around housing, wages, and the new threat caused by high student debt may have the greatest potential to help or harm millennials — things policymakers should heed as this generation grows as a political force.

We come to this conclusion in part by looking to the past. If you compare millennials to other generations you’ll find, somewhat surprisingly, that they share the most similarities with the so-called Silent Generation. These were Americans born in the mid-1920s through the early 1940s and who grew up during the Great Depression, but eventually drove a booming economy.

Just as their grandparents (and great-grandparents) before them, millennials experienced a major financial crisis during their formative years that has infused in them financial conservatism and a propensity to save. They are more likely to keep a larger amount of cash on hand, holding more than half their assets in cash, less than a third in equities, and 15% in fixed-income assets.

So why aren’t millennials guaranteed a strong economy in their middle years? The differences with the Silent Generation come in two areas, in particular: a slow-growth economy with lower wages combined with crushing loads of student debt. The Silent Generation entered adulthood during a robust growth cycle in part due to programs, such as the New Deal and Works Progress Administration. Millennials, instead, have only seen slow to moderate growth in GDP, with near stagnant gain in wages as they enter the workforce.

Adding to this difficulty are massive student loan bills. Millennials are the most educated generation in American history, but it has come at a cost ranging in the hundreds of billions of dollars. Indeed, many of millennials’ spending and saving habits can be attributed to this debt – a major determinant of current and future spending ability, given the length of loan maturities and weak post-recession wage growth to date.

To see the weight student-load debt is having on millennials, consider this: for the first time in at least 10 years, 30-year-olds with no history of student loans are more likely to purchase their homes than those with a history of student debt, according to the New York Federal Reserve Bank. The effects of student-loan debt could be mitigated if the economic recovery continues. A growing economy means the launch of the millennials into the U.S. economy will have been delayed, but not grounded.

Over the next five years, I expect the labor market will keep improving and wages will start increasing. Student loans that once looked very difficult to repay will become manageable, and delays to home-buying—albeit more skewed toward urban areas than in the past—will pick up.

My downside scenario, however, paints a grimmer picture. What if wages continue to stagnate through the next decade due to fundamental shifts in the U.S. economy? How would this anemic (or absent) growth impact a generation, which already must wait an added four years to reach middle-income status?

First, graduates with modest income opportunities would likely continue to use government options in order to delay student-loan payments – an option that may prevent default, but also means balances would climb. More borrowers would be caught in the web of higher balances, where they can only barely cover minimum payments, which in turn would continue to weigh on their credit scores.

The potential impact of this outcome on the economy could be significant. Millennials would likely be forced to continue their current pattern of economic behavior, avoiding big-ticket purchases like cars or homes and continuing to delay starting families. Options to take on more debt to start a business would be curtailed, with business creation holding near current 20-year low levels.

Further, housing starts would climb only slowly, with most activity in rental units, rather than single-family homes. Indeed, if millennials were to buy homes at the same sluggish rate as in the current recovery, housing starts wouldn’t reach 1.5 million units until almost two years later than in our baseline projection.

This is why it’s crucial for economists, policymakers, and the business community to consider this downside scenario when thinking of the future of the U.S. economy, and to have options ready to combat a difficult adulthood for this otherwise promising generation.

If, as we hope, millennials inherit a more robust economy and with higher wages and growth potential, we will more likely see the launch they appear very capable of orchestrating.

Beth Ann Bovino is the U.S. chief economist at Standard & Poor’s.

As appeared in Fortune Magazine. 

A Tale of Two Energy Cities – Dallas and Denver

This post examines the relationship between Dallas and Denver, utilizing the S&P/Case-Shiller Home Price Index for each city.  The pair was selected based on a correlation analysis that yielded a correlation coefficient of 0.84 between the two cities.  This analysis covered the 20 metropolitan indices in the S&P/Case-Shiller Home Price Index series, utilized log returns to account for the skewness in the home price data, and spanned a time period of 14 years.

Exhibit 1 depicts the levels of the home price indices for Dallas, Denver, and the entire U.S.  For both Dallas and Denver, a trough was felt in February 2009, and the indices are now up 27.7% and 31.8% since that time, respectively (as of Jan. 31, 2015).  Both Dallas and Denver have been recording new peaks since the first quarter of 2014.


Exhibit 2 summarizes the results for January 2015, showing the year-over-year percent changes.  It can be seen that Dallas and Denver are two of the best performers, up 8.1 and 8.4%, respectively.


To attempt to identify drivers that could explain the correlation, we evaluated various housing factors, such as foreclosure rates, housing permits, population change and employment by industry.

In terms of population change, Dallas and Denver grew at varying rates.1  Dallas lost 30% and Denver lost 29.1% in permit issuance for single-family homes between 2004 and 2013,2 and Denver had a slightly worse foreclosure rate (1.4%) than Dallas(0.4%).3  For employment by industry,4 “Trade, Transportation, and Utilities” was the highest employment industry for Dallas and Denver by a large margin.  It should be noted that this industry also had a large allocation from other, uncorrelated metro areas.


These findings led us to explore more theoretical analysis.  The energy industry is considered the cornerstone of Dallas and the North Texas economy.  Denver, long hailed the Houston of the Rockies, is the largest city in a 600-mile radius of energy companies that are investing in the oil and gas fields of Colorado, Wyoming, Montana, and North and South Dakota.5  Metro Denver and the Northern Colorado region ranked fourth for fossil fuel energy employment, and fifth among the nation’s 50 largest metros for cleantech employment concentration in 2014.6

The energy industry fuels jobs and activity across a range of fields, affecting population, income, and therefore, the housing market.  The industry is thus a strong candidate as a reason for what is driving Dallas and Denver’s intertwining performance.  It will be interesting to see what the impact of the plunging price of oil on the two cities will be, and if one (or both) will be affected, especially in comparison to the other metropolitan areas.

On a lighter note, and if you are still not convinced that there is a correlation between the two cities, here is a tidbit of information.  In 1981, ABC launched a Denver-based, oil tycoon soap opera to compete with the CBS primetime oil company-owning family series Dallas.

1. Census.gov, Large Metropolitan Statistical Areas—Population: 1990 to 2010
2. Census.gov, New Privately Owned Housing Units Authorized Unadjusted Units by Metropolitan Area
3. Foreclosure.com
4. Bureau of Labor Statistics
5. Cathy Proctor, Denver Business Journal, “Denver posed for growth from energy sector – and millennials”.
6. http://www.metrodenver.org/industries/energy/

Tables and Charts from the S&P/Case-Shiller Release

The first chart shows the Condo indices:

The next chart shows the low, mid and high price tier indices for San Francisco.  The indices moving together recently suggests that the boom-bust bubble is behind us.

The first table  shows the highs and low for the indices, the second shows the year-over-year changes, ranks for year-over-year changes and the current index levels.

Click on table for larger image

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