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Sunday, September 28, 2014

Q3 Review: Ten Economic Questions for 2014

by Calculated Risk on 9/28/2014 11:35:00 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 then try to understand why I was wrong).

By request, here is a Q3 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. 
There are international risks - China remains a downside risk, Europe (and the Euro) are still a mess, and the situations in the Ukraine and Iraq are serious, but overall it appears that downside risks to the U.S. economy have diminished this year.

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.
The NAR reported inventory was up 4.5% year-over-year in August. Note: I used to follow "Housing Tracker" weekly, but the site had some data problems and they discontinued the series. It looks like a 10% to 15% increase this year might be close - but a little high - based on the NAR reports.

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.
We may be seeing a little loosening according to the most recent Fed Senior Loan Officer survey showed some loosening of standards:
A moderate net fraction of domestic banks reported having eased their standards on prime residential mortgages, on net, while most indicated that standards on nontraditional mortgages and home equity lines of credit (HELOCs) were relatively little changed. Banks reported having experienced stronger demand, on balance, for prime residential mortgages for the first time since a year ago...
emphasis added
But this is just for prime mortgages.

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 through June (8.1% year-over-year gain for Composite 20), and it appears price increases are slowing. My prediction still seems OK, but if anything, house prices might slow more than I expected.

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 August, new home sales were up 2.7% over 2013, and housing starts were only up 8.6%  year-over-year.  There was a slow start to 2014 mostly due to higher mortgage rates, higher prices and supply constraints in some areas - and a little bit due to the weather. I still think fundamentals support a higher level of starts, and I still expect starts and new home sales to be up this year (but not as much as I initially expected).  An optimistic view is that this means more growth next 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.
QE3 will end in October.

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.
Inflation is not a concern this year.

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 6.1% in August and it looks like I was too pessimistic.

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 August 2014, the economy has added 1,723,000 jobs, or 215,000 per month.  So far this is at the expected pace.

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 was very disappointing, but economic activity picked up in Q2.  However PCE hasn't picked up as much as I expected (only 2.5% in Q2).   GDP should be solid in Q3 (and probably in Q4 too),  but  growth will probably be closer to 2% again this year.