Hardwood Floors February/March 2019

INDUSTRY INSIGHTS MARKET MATTERS

RISING ECONOMIC RISKS for the National Outlook

The U.S. economy has shown steady – if unspectacular – growth during the past eight years. Between 2010 and 2017, the economy has grown on average by 2.2 percent. However, this is less than the economy’s 50-year growth rate of 3.5 percent and lags the average annual growth rate in the years between the tech bubble burst (2001) and the Great Recession (which began in 2007). During the past nine years, the economy’s potential rate of growth has been 1.5 percent. This potential, estimated by the federal government, reflects the maximum sustainable rate of economic growth. Although actual gross domestic product (GDP) growth has fallen behind pre-recession rates, it has exceeded the average potential rate during the same period. As a result, actual and potential overall GDP has converged, indicating that the U.S. economy is nearing a national recovery. Even though GDP growth in 2018 is expected to hold steady, partly due to tax cuts, the expectation for 2019 is a deceleration in growth as interest rates rise.

The economic recovery also has been characterized by sustained job growth. As a result of the Great Recession, the number of jobs around the country sank to 94 percent of the total, pre-recession (138.4 million). Since reaching this low point, payroll employment has climbed steadily, rising 8 percent above the peak number of jobs prior to the last recession. Sustained job growth has contributed to a decline in the unemployment rate. After peaking at 10 percent due to the Great Recession, the unemployment rate has steadily fallen, dropping to a historically low rate of 3.7 percent in October, the lowest level since 1969. By these metrics, labor market conditions have normalized. At the same time, continued job growth at its current pace will meet resistance unless more people enter the labor force. In addition, home prices continued to rise in August. This continued home price appreciation reflects broader economic growth and tight inventory across the county. Since house price appreciation has exceeded per capita personal income growth, concerns about homeowner affordability have become serious. In fact, the NAHB/Wells Fargo Housing Opportunity Index, a housing affordability measure, finds that only 56 percent of new and existing home sales were affordable for a typical family in late 2018. This measure of affordability conditions marks a 10-year low. Concerns about housing affordability have been aggravated by the increase in mortgage rates in 2018, which are expected to rise in the coming two years to more than 5 percent. Rising mortgage rates largely reflect the rising rate of the 10-Year Treasury Note, which itself parallels the trend in the federal funds rate. Taken together, it suggests that mortgage rates have been rising because monetary policy has been tightening.

20 hardwood floors www.hardwoodfloorsmag.com