Not a Beautiful First Quarter GDP Growth

Economic growth numbers for the first quarter will be announced next week, and it looks like it will be a huge miss. The numbers could well be just a hair above the zero growth line. The average growth rate from 1950 to 2000 was 3.7%. President Bush’s term from 2001 to 2008 generated an average GDP annual growth rate of 2.1%, while President Obama’s term yielded 1.5%. President Trump campaigned on pulling the economy back above 3%, and will therefore be sorely disappointed.

One big reason for the weak first quarter is that vehicle sales are no longer rising. After hitting over 18 million annualized vehicle sales in the final quarter of last year, the first quarter sales were 17.3 million. That figure is fine and healthy, but no longer rising. Even though consumer confidence has soared to a decade high, the actual consumer consumption increases have yet to play out. Retail sales have been solid with 5% growth, but more of the growth appears to be from price increases than from unit sale increases. Only the latter counts toward the GDP to reflect an improved standard of living.

Another source of sluggish economic growth that is more persistent is the lackluster growth in new home construction. If housing starts had recovered like in past cycles, then GDP growth could have been about 2% points higher, according to Professor Ken Rosen of University of California at Berkeley. That is, rather than the actual 2016 GDP growth rate of 1.6%, it could have been 3.6%. Disregard the great optimism of homebuilders as indicated by the Housing Market Index, where the latest months reading is matching up with 2005 when homebuilders constructed 2.1 million new homes. This year’s housing starts are barely above 1.2 million on an annualized rate. Many small homebuilders who went bankrupt during the downturn are evidently not filling out the survey to express their displeasure at the current underperformance of the industry.

The first quarter weakness does not imply an impending recession. Unemployment claims have been rapidly falling, something that does not happen if recession is around the corner. Given the continued job gains and modest signs of wage acceleration, consumers should swing back quickly for the remainder of the year. Nonetheless, given the soft economic conditions, President Trump should focus more intently on how the housing market can help economic growth. Simply, if more homes are built – something that the country clearly needs as indicated by very low housing inventory and very low vacancy rates – then economic growth will likely reach closer to the President’s goals. Moreover, greater supply will help with housing affordability, thereby leading to more home sales and the accompanying rise in purchases like appliances, furniture, and lawn care.

If President Trump ignores the housing sector, then the economy will continue to crawl. Also, let’s keep in mind that over the past five years a typical worker’s wage grew by 11%, while rents rose 17%, and home prices 41%. Voters will be asking why the American Dream of homeownership is less attainable, and why the rents are so damn high.

Read original article here!