Moody’s Economist Echoes Optimism

October 19th, 2012 by DWM Magazine

Optimism reigned during the National Association of Home Builders’ (NAHB) Construction Forecast webinar on October 17. NAHB economist David Crowe outlined positive trends for housing and when Mark Zandi, chief economist with Moody’s Analytics, took the microphone after Crowe, he continued that positive theme.

Focusing on the economy as a whole, he first pointed out a forecast for the GDP to grow roughly 2 percent this year. “I expect something close to that for the calendar year 2013, but by 2014 I expect double that, growth closer to 4 percent, and about the same in 2015,” he said.

Zandi went on to predict a similar trend with job growth, with higher gains in 2014 and 2015. “Unemployment I don’t think goes anywhere fast in the coming year … but I do think with stronger growth in 2014, 2015, unemployment will fall. I expect to be back to full employment by 2016. A big part of the optimism is related to the revival of the housing market,” he said.

“There are of course a range of assumptions behind this optimism,” he added. “I do expect mortgage rates to remain low; the fixed mortgage rate is about as low as it gets right now.” Zandi expects that rate to be back to that of a “normally operating economy” (a 6-percent rate) by about 2015.

“I’m also assuming that the availability of credit improves. I think it has been improving … and I would expect that to continue as we make our way into next year … and that’s almost regardless of any significant changes to mortgage lending,” he said.

“Of course, one very important element to this optimism goes to the job market, and I am expecting the job market to gain traction. If you look at what’s going on in the job market more carefully, it’s clear that the problem isn’t so much layoffs … the problem is a lack of hiring …” Prior to the downturn in 2006 statistics were indicating monthly hires between 5 and 5.5 million, Zandi said. Not surprisingly, during the recession the number of hires fell very sharply, but even since job growth resumed in 2010, the number of new hires remains very low. “There’s a shortfall in hiring of about 1 million a month. “Weakness in hiring is pretty much across the board,” he added, from the smallest company to the biggest multinationals. If anything, the multinational big companies are getting closer to those bigger hiring rates, he added. The weakest size class, he says, is the 20-55 employee range.

“One thing that I don’t think is contributing to the weakness of hiring is the financials of American companies,” Zandi continued. “American companies are doing pretty well.” He indicated that profit margins in 2010 have reached close to record highs, as businesses increase productivity to reduce costs. “So in my mind it’s not a question of can businesses go out and hire more, it’s more generally a question of confidence,” he added.

Instead, he suggested weak sales may be playing a role in the low hiring levels, particularly in any industry related to construction or housing—including manufacturing, retail or transportation. That remains the biggest problem facing businesses, according to Moody’s surveys.

Regarding housing, Zandi commented, “We really are making good progress in righting the wrongs in the housing market. One of the most fundamental wrongs was just putting up too many houses in the last boom … We’re quickly going from an environment of significant excess vacancy to something that’s much more balanced.”

He expects that to be balanced by early next year. “Certainly by next spring, certainly early summer, there will be no excess vacancy,” he said. In fact, Zandi predicts that by 2014 the housing market will be undersupplied. “I think the only missing ingredient now is the political will necessary to address those fiscal issues in a reasonable way,” he concluded.

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