Economy Weakens / Home Equity Stalls
A: We got a surprisingly weak GDP report today that was largely a result of the slowing housing market going on across the nation; except Manhattan. Analysts were forecasting a GDP of 1.8%, and the actual growth rate came in at 1.3%. On a side note, Calculated Risk discusses how Home Equity is starting to stall (via The Wall Street Journal) and how that will ultimately affect consumer spending.
First, the US economy stalled in the latest report on economic growth as the housing decline seemed to shave at least a percentage point off growth in the latest quarter.
According to CNN Money -
The reading showed the U.S. economy growing at an annual rate of 1.3 percent in the first three months of the year, according to the Commerce Department. The report was the initial reading on gross domestic product, the broadest measure of the nation's economic activity.With this weak economic number, one thing is certain; the fed will be on hold with interest rates for a while! There seems to be uncertainty creeping its way into the economic world right now, something the tradable markets genuinely dislike. Questions that are popping up in my mind are:Among the biggest factors in the weak growth was a slumping U.S. housing market, which subtracted almost a percentage point from growth.
The report also showed growing inflation pressures in spite of the the slower growth, a factor that could limit the Federal Reserve's freedom to cut interest rates in an effort to stave off a slowdown or recession.
Will the slowing housing market have a bigger impact on future economic growth?
Will inflation moderate as the economy slows?
How low will the US dollar now go with this weak GDP number?
Will stocks start to correct due to this uncertainty even though profits are still strong?
What will the fed do with monetary policy?
Alot of questions that are very hard to answer right now! A while back I discussed the possibility of entering a period of stagflation; that is cooling economic growth coupled with rising inflation pressures. In my post titled, "Jobless Claims Strong - Macro Update", back on April 19th I stated:
What you need to know is that right now we very well could be heading into a period of stagflation; that is high inflation and slowing economic growth via rising unemployment or a recession. The problem with this scenario is that if the fed tries to control one problem they can make the other problem much worse! The markets HATE uncertainty because there is little transparency in the short term for their investments. Whether or not the fed will become more transparent with fed policy and begin to publicly announce a target fed funds rate is still up in the air. For now, we are left to speculate based on the data that comes in.And the data that came in today says ---> HOUSING IS WEAKENING THE BROADER ECONOMY!
Why did the housing slowdown have such a large affect on GDP? Because its not just housing prices declining that hits the US consumer. What about companies that make money off of housing transactions, what about the suppliers of raw products for housing (recall my post on falling lumber prices), what about the transports and logistics companies that deliver products to their destination, and finally what about the consumer who decides NOT to tap into equity because the value of their home is less than it used to be!
Home Equity Withdrawal (also known as MEW or Mortgage Equity Withdrawal) seems to be stalling as reported by the WSJ and discussed on Calculated Risk.
According to the Wall Street Journal -
After years of piling debt on their homes, Americans are becoming more cautious about using them as a piggy bank.According to Bill over at Calculated Risk -A cooling housing market and higher interest rates have made homeowners more reluctant to tap the equity they may have built up in their residences. The amount borrowers owe on their home-equity lines of credit has slipped in the past six months, to $561 billion at the end of March, the first such decline since 1999, according to new data from Equifax Inc. and Moody's Economy.com Inc.
Now, the slowdown in home-equity borrowing is leading to weaker sales in some markets for autos, building materials and electronics, says Mark Zandi, chief economist of Economy.com.
This is one of the keys going forward - the impact of less home equity extraction on consumer spending.He is 100% right! What is yet to be seen and what could be another leg added to the housing cooldown is to what extent US consumer spending slows as a result of less money available to be taken out of their homes!
