Sunday, April 13, 2014

Q1 Review: Ten Economic Questions for 2014

by Calculated Risk on 4/13/2014 11:51:00 AM

At the end of last year, I posted Ten Economic Questions for 2014. I followed up with a brief post on each question. The goal was to provide an overview of what I expected in 2014 (I don't have a crystal ball, but I think it helps to outline what I think will happen - and understand why I was wrong).

By request, here is a Q1 review. I've linked to my posts from the beginning of the year, with a brief excerpt and a few comments:

10) Question #10 for 2014: Downside Risks

Happily, looking forward, it seems the downside risks have diminished significantly. China remains a key risk ... There are always potential geopolitical risks (war with Iran, North Korea, or turmoil in some oil producing country).  Right now those risks appear small, although it is always hard to tell. ...

When I look around, I see few obvious downside risks for the U.S. economy in 2014. No need to borrow trouble - diminished downside risks are a reason for cheer. 
China remains a downside risk, and the situation in Russia and Ukraine is serious, but overall it appears that downside risks have diminished.

9) Question #9 for 2014: How much will housing inventory increase in 2014?
Right now my guess is active inventory will increase 10% to 15% in 2014 (inventory will decline seasonally in December and January, but I expect to see inventory up 10% to 15% year-over-year toward the end of 2014).  This will put active inventory close to 6 months supply this summer.   If correct, this will slow house price increases in 2014.
Right now, through April 7th, inventory is up 7.7% compared to last year according to Housing Tracker. The NAR reported inventory was up 5.3% year-over-year in February.  So far a 10% to 15% increase this year looks about right. 

8) Question #8 for 2014: Housing Credit: Will we see easier mortgage lending in 2014?
Bottom line: I expect lending standards to loosen a bit in 2014 from the tight level of the last few years.   It will be difficult to measure, but I'll be watching what Mel Watt says, what private lenders say, comments from mortgage brokers, and MEW.
It is early in the year, but so far there is little evidence of looser mortgage lending standards.

7) Question #7 for 2014: What will happen with house prices in 2014?
In 2014, inventories will probably remain low, but I expect inventories to continue to increase on a year-over-year basis. This suggests more house price increases in 2014, but probably at a slow pace.

As Khater noted, some of the "bounce back" in certain areas is probably over, also suggesting slower price increases going forward.  And investor buying appears to have slowed.  A positive for the market will probably be a little looser mortgage credit.

All of these factors suggest further prices increases in 2014, but at a slower rate than in 2013.   There tends to be some momentum for house prices, and I expect we will see prices up mid-to-high single digits (percentage) in 2014 as measured by Case-Shiller.
We only have Case-Shiller data for January - and price increases might be slowing, but it is too early to tell.

6) Question #6 for 2014: How much will Residential Investment increase?
New home sales will still be competing with distressed sales (short sales and foreclosures) in some judicial foreclosure states in 2014. However, unlike last year when I reported that some builders were land constrained (not enough finished lots in the pipeline), land should be less of an issue this year. Even with the foreclosures, I expect another solid year of growth for new home sales.

... I expect growth for new home sales and housing starts in the 20% range in 2014 compared to 2013. That would still make 2014 the tenth weakest year on record for housing starts (behind 2008 through 2012 and few other recession lows).
Through February, new home sales were unchanged from 2013, and housing starts were actually down 1% year-over-year (permits were up 5%).  This is a slow start to 2014, and I don't blame all of the recent weakness on the weather (probably just a small factor). There are also higher mortgage rates, higher prices and probably supply constraints in some areas. But I still think fundamentals support a higher level of starts, and I expect starts and new home sales to pick up solidly again this year.

5) Question #5 for 2014: Monetary Policy: Will the Fed end QE3 in 2014?
[E]ven though the Fed is data-dependent, I currently expect the Fed to reduce their asset purchases by $10 billion per month (or so) at each meeting this year and conclude QE3 at the end of the 2014.
So far right on schedule.

4) Question #4 for 2014: Will too much inflation be a concern in 2014?
[C]urrently I think inflation (year-over-year) will increase a little in 2014 as growth picks up, but too much inflation will not be a concern in 2014.
It is early, but inflation was still low through February.

3) Question #3 for 2014: What will the unemployment rate be in December 2014?
My guess is the participation rate will stabilize or only decline slightly in 2014 (less than in 2012 and 2013) ... it appears the unemployment rate will decline to the low-to-mid 6% range by December 2014.
The unemployment rate was 6.7% in March, unchanged from December.

2) Question #2 for 2014: How many payroll jobs will be added in 2014?
Both state and local government and construction hiring should improve further in 2014.  Federal layoffs will be a negative, but most sectors should be solid.  So my forecast is somewhat above the previous three years, and I expect gains of about 200,000 to 225,000 payroll jobs per month in 2014.
Through March 2014, the economy has added 533,000 thousand jobs; 178,000 per month.  Employment was clearly impacted by the poor weather, and I still expect employment gains to average 200,000 to 225,000 per month in 2014.

1) Question #1 for 2014: How much will the economy grow in 2014?
I expect PCE to pick up again into the 3% to 4% range, and this will give a boost to GDP.   This increase in consumer spending should provide an incentive for business investment.  Add in the ongoing housing recovery, some increase in state and local government spending, and 2014 should be the best year of the recovery with GDP growth at or above 3%
The first quarter will be disappointing (most early estimates are around 1% growth in Q1), but I expect economic activity to pick up in the last three quarters of the year.

Overall activity in 2014 is a somewhat lower than I expected.  However my outlook for the year remains about the same.