ABA Banking Journal - September 2007 - (Page 68)

briefing The Economy KEITARO MATSUDA Senior Economist Union Bank of California, NA, San Francisco Will housing push us into recession? A POPULAR JOKE TELLS US that economists have forecast nine out of the last five recessions. Economists always seem to be warning of one risk or another. Over the past few years, the risk most commonly cited has been the housing market. There is no doubt that the housing market is going through a correction, and how this correction unfolds will influence the course of the economy in coming quarters. Fortunately, the housing correction to date—as distinguished from the low end of the mortgage market—has been more gradual and orderly than most people expected. The housing sector affects the general economy mainly through: 1. residential investment, 2. construction employment, and 3. wealth effect on consumer spending. It is worthwhile to examine whether any of these factors can be a cause for the next recession. First, let’s consider investment. Housing investment occurs in two ways: new home construction, and upgrading of existing properties. The second quarter real Gross Domestic Product growth was 3.4%. Weak residential investment subtracted almost half a percentage point from overall GDP growth in the second quarter. The drag from the housing sector, however, lessened to -9.3% from -16.3% in the first quarter. According to the Census Bureau, the number of housing units being constructed across the country dropped 24.2% on a year-over-year 68 SEPTEMBER 2007/ABA BANKING JOURNAL basis as of May. The GDP number looks considerably better, because it includes investment in existing properties as well. Work related to existing homes has picked up lately, because sellers now have to upgrade their properties in order to attract buyers. The above-mentioned housing starts data would make us believe that construction employment is also falling rapidly. In reality, the number of construction jobs has remained stable. The year-over-year change was negative 0.3% in June. Plausible explanations for this consumer spending. The [latest or second quarter] GDP data show continued growth of consumer spending. Surveys also show that the household sector remains generally upbeat. A very tight labor market obviously keeps consumers feeling secure about their jobs and future income. Stable (not falling) home prices mean that the significant home equity that owners have accumulated is intact. Recent employment and industrial production data show that the economy still has good momentum. Consumer spending remains robust and GDP data: Output growth 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% 02 Total GDP Housing investment 3.4% -9.3% 03 04 05 06 07 Percent change from preceding period. Seasonally adjusted at annual rates. Souce: Bureau of Economic Analysis. include the following: First, commercial construction activities have increased; second, new homes are still being built, albeit at a slower pace; third, some residential contractors are now remodeling and expanding existing homes. Finally, let’s see whether the housing slowdown has adversely affected business investment has increased. It would likely take a bigger shock (perhaps combined with decreased residential investment and construction employment) to send the economy into a recession. Leave it to economists, if you wish, to come up with more recession scenarios than you might care to ponder. BJ www.ababj.com/subscribe.html http://www.uboc.com http://www.ababj.com/subscribe.html

Table of Contents Feed for the Digital Edition of ABA Banking Journal - September 2007

Contents Editor's Column Briefing: Why Money Sense is a Top Priority Briefing: Sleight of Mind Briefing: Snapshot: What the First Half Tells Us About the Second Half Briefing: ABA Resources ABA Chairman’s Position Briefing: Get Away and Get Ahead: ABA's Banking Leaders Forum Community Banking: Trim the Fat: Winning the "Battle of the Buck" Community Banking: Pass the Aspirin Cover Story: Meeting the Challenge of the "Unbanked" Bank Marketing: Don't Miss the Boom! On the Job: Time to Power Up Your Presentations? Insurance Sales: The Art & Craft of Cross Selling Tech Topics: The Price is Right? Tech Topics: Security: Protect Information First Tech Topics: Hackers for Hire? You Bet'cha Tech Topics: Case in Point: Tellers Scan, Too, at First Federal Compliance Clinic: Adverse Action Clarified The Economy Banker’s Mart To Advertise/Index of Advertisers

ABA Banking Journal - September 2007

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