Michael Evans
1/20/2006, 09:30 PM
The consensus viewpoint is gradually coming around to realize that 2006 will be a weak year. The latest development was the reduction of the consensus growth rate in 2005.4 below 3%; the latest figure is now 2.8%. We're holding at 2.5%. Technically of course that's not part of this year, but it does grease the skids for slower growth, and also pulls down the yearly averages.
There is some confusion about what sectors are weak, though. In a month in which employment growth, non-auto retail sales, mfg production excluding high-tech, and housing starts were all flat or down it looks like everything is weak. Most bears have identified housing as the sector that will pull the economy down, both because starts will be lower and because home equity extraction will decline, and to a certain extent that's true. But when the year is over, housing starts will still have held up around 2 million units, and the weakness will be more apparent in other areas. In particular.
Over the past several years, net exports have subtracted about 0.7% from the overall growth rate on a static basis (i.e., before considering multiplier effects). Last year, that figure rose to only a 0.2% deficit, largely because of the favorable impact of the declining dollar in previous years. But now that the dollar turned around and rose approximately 12% last year, the drag of the trade deficit should return to its normal 0.7%, and could very well be as high as 1.0%.
Motor vehicle sales may not actually change very much this year, but there has already been a tremendous shift in the mix, as consumers are moving toward less expensive vehicles. That will put a damper on overall consumer spending all year long. Estimated drag on GDP: 0.2% to 0.3%.
We think housing prices will rise 5% to 6% this year, which is actually a fairly decent number, but pales with respect to the double-digit gains of the past two years. More to the point, when housing prices 5% to 6% and mortgage rates are at least 6%, all those funny-money deals where people meet their living expenses by refinancing go out the window. That is likely to reduce total growth by another 0.5% this year.
As far as capital spending goes, it was flat excluding the high-tech sector last year, so we don't see any further reductoin in 2006.
Nonetheless, adding up these other factors appears to reduce real growth by about 1 1/4%; when subtracted from 3.5% last year, that would put the growth rate even below our 2.5% estimate. That's because we expect some near-term stimulus from rebuilding after the hurricane. But as that wears off, real growth could really stagnate later in the year. It won't be a pleasant scene for those looking for jobs.
There is some confusion about what sectors are weak, though. In a month in which employment growth, non-auto retail sales, mfg production excluding high-tech, and housing starts were all flat or down it looks like everything is weak. Most bears have identified housing as the sector that will pull the economy down, both because starts will be lower and because home equity extraction will decline, and to a certain extent that's true. But when the year is over, housing starts will still have held up around 2 million units, and the weakness will be more apparent in other areas. In particular.
Over the past several years, net exports have subtracted about 0.7% from the overall growth rate on a static basis (i.e., before considering multiplier effects). Last year, that figure rose to only a 0.2% deficit, largely because of the favorable impact of the declining dollar in previous years. But now that the dollar turned around and rose approximately 12% last year, the drag of the trade deficit should return to its normal 0.7%, and could very well be as high as 1.0%.
Motor vehicle sales may not actually change very much this year, but there has already been a tremendous shift in the mix, as consumers are moving toward less expensive vehicles. That will put a damper on overall consumer spending all year long. Estimated drag on GDP: 0.2% to 0.3%.
We think housing prices will rise 5% to 6% this year, which is actually a fairly decent number, but pales with respect to the double-digit gains of the past two years. More to the point, when housing prices 5% to 6% and mortgage rates are at least 6%, all those funny-money deals where people meet their living expenses by refinancing go out the window. That is likely to reduce total growth by another 0.5% this year.
As far as capital spending goes, it was flat excluding the high-tech sector last year, so we don't see any further reductoin in 2006.
Nonetheless, adding up these other factors appears to reduce real growth by about 1 1/4%; when subtracted from 3.5% last year, that would put the growth rate even below our 2.5% estimate. That's because we expect some near-term stimulus from rebuilding after the hurricane. But as that wears off, real growth could really stagnate later in the year. It won't be a pleasant scene for those looking for jobs.