GDP Mending – Housing Down
by Hiland Doolittle
In its Thursday report, the U.S. Commerce Department announced a slight improvement in the Gross Domestic Product report for the first quarter 2009. Original indications were that the GDP has contracted at an annual rate of 6.1%. That report was lowered to 5.7% and on Thursday was reduced further to 5.5%. Projections call for a mild decline in the second quarter 2009.
Gary Thayer of Wells Fargo Advisors in St. Louis reported, “The economic data we’ve seen so far for the second quarter suggest the preliminary number for the second quarter will show a modest decline, maybe half the rate we saw in the first quarter.”
The GDP shrunk 6.3 % in the fourth quarter of 2008 and 0.5% in the third quarter. The economy is still reeling from the sharp decline.
The Commerce Department reported that the GDP will again contract, although mildly, in the second quarter 2009. The Commerce Department has closed its books on the first quarter. While the final GDP numbers are not as negative as originally thought, there was dark news behind many of the clouds.
Overall business investment plunged at a record 37.3 percent rate in the quarter. American spending on new homebuilding dropped by 38.8 percent. This was the largest quarterly decline in new homebuilding since 1980.
The Commerce Department attributed a drop of 4.16 percentage points to the reduction in exports, which fell 30.6% rather than the originally reported 28.7%. The reduced figure represents the largest drop in foreign sales in 40 years.
Imports also sagged 36.4 percent. This marks the biggest drop in imports since 1947.
The further adjustment to the overall GDP showed that companies had cut inventories at a milder rate than anticipated. Business inventories declined at an $87.1 billion rate rather than the projected $91.4 billion.
Unemployment Climbs
While the GDP turnabout was encouraging, the Labor Department’s newest report added fuel to the unemployment crises. The number of U.S. workers filing for unemployment last week caught forecasters by surprise. New applications increased by 15,000 more than expected to a seasonally adjusted total of 627,000.
6.738 million Americans are now collecting unemployment. This figure does not reflect Americans whose unemployment benefits have expired or whose workweek has reduced hours.
The Commerce Department report cited consumer spending as one of the biggest areas of concern in a recovery. Consumer spending drives two-thirds of U.S. economic activity.
Original projections were that consumer spending would lower by 1.5%. The report stated a 1.4% reduction. Reduced Consumer spending bodes poorly for housing and is usually correlated with unemployment and a tightening of credit.
Americans, who are unsure of their employment stability, are spending less and expecting more negative employment data. Loose consumer spending is on hold.
The Commerce Department reported that corporate profits grew at 1.4% in the first quarter 2009. Projections had been for a gain of 1.1% after a decline of 10.7% in the fourth quarter 2008.
Wall Street responded favorably to the corporate profits report and to the revised GDP figures. Unemployment reports are regarded as a lagging indicator and their immediate impact of the unemployment report is minimal.
Foreclosures Hit Prime Mortgages
Whereas Wall Street may have already anticipated the unemployment rise, the housing market has not. When it comes to home sales and to overall consumer spending, Glen Capelo of Broad Point Capital in NYC said, “It’s all about jobs and people’s ability to pay their mortgages. The financial system, in conjunction with the economy, is still in trouble.”
The National Association of Realtors reported a decline in existing housing prices. The association reported that home prices have fallen 32% since their peak three years ago.
An increase in risk factors and higher unemployment will further ignite foreclosure fires. Unemployment, an increase in interest rates and declining values have led to projections for 2.8 million additional subprime foreclosures in the next 2 years.
After topping off at 9.4% in May, unemployment is expected to top the 10% threshold later this year. Amherst Securities Group reported that outside government-sponsored mortgages, credit remains alarmingly tight. This has caused a sever downturn in demand and driven prices to sharper declines.
In response, the Federal Reserve has committed to purchase as mush as $1.25 trillion in mortgage-backed securities to loosen funding for new homes. Thus far, lenders remain cautious.
Government-sponsored lending, called agency debt, accounted for 98% of residential loans in the first quarter 2009. When the housing market was at its peak between 2005 and 2008, government-sponsored lending was less than 50%. Today, much of the agency debt applications are centered on refinancing rather than new mortgages.
The NAR said 3.85% of outstanding residential mortgages are in foreclosure. A new trend indicates that prime, fixed-rate mortgages comprised the lion’s share of recent foreclosure activity and expands the severity of the housing crunch.
Initially, foreclosures were contained to sub prime loans. Prime mortgagors have lost jobs, gone through savings and can no longer invest in homes whose mortgages are higher than appraised values.
Patrick Newport of IHS in Lexington MA said, “What’s driving people to leave their homes is a combination of having their house under water and then losing their job.”
Tags: 2009 Stimulus Package, depression, dollar, Economy, GDP, housing, interest rates, recession, Stimulus Plan, US Dollar, US NonFarm Payrolls, US Retail Sales, US Unemployment
About the Author - Hiland Doolittle
Hiland is a professional writer with extensive entrepreneurial experience. He is a graduate of St. George’s School Newport, RI and the State University of New York at Albany where he majored in history. He has been active in the real estate business for 30 years and has founded and sold several businesses.
Hiland currently writes for several financial sites and is a published author of the novel The Last Parade. He has recently completed a manuscript for a children’s book entitled Sami and The Minnow Man.
