In its August Economic and Housing
Market Outlook Freddie Mac celebrates, sort of, a birthday. It was
four years, at the end of June, since the recession officially ended.
But four full years of data confirm that widely held perceptions
about the recovery are true; real GDP growth has been slow and the
recovery has been lackluster.
Freddie Mac Chief Economist Frank E.
Nothaft and Deputy Chief Leonard Kiefer note that in the previous ten
recessions GDP grew an average of 17.4 percent in the first four
years of recovery; this time real GDP growth has been 9.0 percent,
most closely resembling the downturn that began in May of 1954, a
recession that double dipped.
So what is wrong this time? Nothaft
and Kiefer point to the four components of overall growth;
Consumption, Residential Fixed Investment, Government Spending, and
Everything Else, a category that includes non-residential fixed
investment, inventories and net exports. In this recovery government
spending has been a net drag for the first time in over 40 years.
The Stimulus helped government spending add 2 percentage points to
growth in 2009 but its subsequent wind down, cutbacks by state and
local governments, and further contractionary fiscal policy
subtracted over 5 percentage points from GDP growth post 2009.
Another factor, fixed residential investment was absent until
recently. In prior recoveries this component led the expansion and
helped to pull other sectors into recovery, adding about a quarter
point to the GDP each quarter. This time the contribution has been
one-fifth that. Third, consumption spending has added only about
1.2 percentage points to growth in contrast to the 2.5 point average
in other recoveries.
But there is good news in the housing
sector with solid growth in housing starts (up 18 percent), home
sales (+13 percent) and national house price indices rising around 10
percent in the last year. A rapidly improving housing market,
Freddie Mac Says, will help the economic recovery in at least three
Increased demand for housing will
help stimulate new single- and-multifamily construction and boost
home sales The report projects housing starts to hover just below
one million units (seasonally adjusted) during the first half of the
year and to add approximately 3/8th of a percentage point
directly to GDP growth. It will also help to employ many more
people in construction and other housing-related jobs.
Rising home prices should help
spur consumption spending by increasing the net wealth of families.
As wealth rises families typically increase consumption spending and
may even tap into the equity in their homes for either consumption
or investment. Freddie Mac’s second quarter refinance report found
that the latter might already be happening with cash-out refinancing
up from a year earlier.
Finally rising home prices will
spur small business formation as business owners’ homes often serves
as collateral to start businesses. Small business growth has been
very weak, actually subtracting from net job creation from 2008
through 2011,. Recent Census Bureau and University of Maryland
research indicate that 42 percent of the decline in the performance
of young firms relative to mature firms is due to decline in home
Nothaft and Kiefer conclude by saying
that the recovery as it passes its fourth birthday has yet to show
maturity but may be ripe for a growth spurt. “And that economic
growth will be fed by a continued rise in housing demand and property
values, which in turn will stimulate job gains, consumption spending,
and investment; some of the latter in small businesses.”