1. TODAY’S ECONOMIC ENVIRONMENT
So Far, There Are Few Surprises
The Economic News Seems Bleaker, But The Reality is
About As Expected
There has been plenty of news since our spring symposium in May, but none of it has changed the outlook significantly. Mostly, the news has simply confirmed our earlier forecasts.

2. REAL GDP GROWTH Annualized Quarterly Growth Rates
GDP Growth Rate
The U.S. Economy is, as predicted, slowing down. The news vacillates back and forth from discouraging to encouraging. Recession, Wall Street’s favorite “R” word, comes and goes. But, so far the slowdown has been moderate as expected. Real GDP growth has declined, but no more than it did in the mid 90s during the period of the last mid-course correction which ended in a so-called “soft-landing”.
Date
Source: St. Louis Fed

3. NATIONAL EMPLOYMENT Annual Year Over Year Growth Rate
Annual Percent Growth
Employment growth has also slowed, but with the BLS revisions two weeks ago, the slowdown in national job growth appears to be moderate as well. New job creation was still sufficient to bring the unemployment rate down to 6 year lows. However, we can’t keep replicating October’s low job growth performance without pushing the unemployment rate back up again.
Date
Source: BLS

4. BUSINESS INVESTMENT Non-Residential: Annualized Quarterly Gains
Annualized Percent Change
Most encouraging is that while there are signs that new business investment is leveling off, it certainly isn’t plummeting. However, last quarter’s gains were not as bright as they appear on this chart, because I believe a good portion of those gains were in the form of unwanted growth in inventories. Nonetheless, higher interest rates appear to have had only a minor effect upon investment. Remember, however, that this graph shows non-residential investment. Residential investment, as most of you know, is down substantially since spring.
Date
Source: St. Louis Fed

5. THE HOUSING MARKET CORRECTION
It Is Also Taking
The Expected Course
Speaking of residential, the housing market also appears on target, following the course we outlined last November and this May. This market is not in a free fall as the pessimists insist, nor is the end of the correction just right around the corner as the optimists would like us to believe.

6. NATIONAL NEW HOME MARKET Average Annual Growth Rate: Sales and Starts
Percent Increase
Nationwide, new home sales and starts have fallen substantially. I think what has spooked many market observers is how quickly things have reversed. But, the correction was inevitable. Its suddenness is often how bubbles burst. Nonetheless, we don’t see anything at this point much different from what we’ve been expecting to happen now for more than a year.
Date
Source: Census Bureau

7. HOME PRICE APPRECIATION Annual Year Over Year Percent Appreciation
Annual Percent Gain
I’m surprised that some analysts are stunned that prices have actually fallen this summer and fall. Without a decline in prices, the housing market correction would have resulted in a prolonged period of stagnation. The market is just doing what needs to be done to heal itself. The shake out is nowhere near complete, but progress is being made.
Year
Source: NAR

8. U.S. MORTGAGE FORECLOSURES
(Percent of Outstanding Mortgages)
Percent Foreclosures
As we documented this spring, one of the more serious problems in the housing market has been the proliferation of sub prime lending, in which mortgage bankers have lent to unqualified borrowers. We indicated at our real estate symposium that sub prime mortgages represent a quarter of all lending today. Add to that growing evidence of outright fraud in mortgage lending which is now gaining wide-spread federal attention and you have the formula for a perfect storm. This part of the housing market correction will not be resolved without pain.
Year
Source: BMA

9. FORCES ACTING ON THE NATIONAL ECONOMY
A. Consumer’s Health
Debt Burdens
Interest Rates
Energy Prices
Deteriorating Home Equities
B. Business Investment
C. International Trade
Value of the Dollar
Weakening International Economies
So while the national economy still seems to be holding up reasonably well, it’s got a lot to handle right now. For the consumer, the good news is that it appears interest rates have stabilized and energy prices have backed off their highs. But consumers are still up to their necks in debt and are now beginning to experience reduced wealth as home values decline.
Businesses too are getting a breather as it appears the FED is through raising rates for now and as their energy costs have dropped as well. They just need to hope that consumer spending holds up at tolerable levels.
More and more businesses rely on international sales, and they are beginning to feel the pinch of an economic slowdown that is starting to spread throughout the world economy. Their pain, however, may be eased somewhat by a further deterioration in the dollar.

10. WHILE THE ECONOMY IS HOLDING UP FAIRLY WELL, IT IS LIKELY TO GET WORSE BEFORE IT GETS BETTER
The bottom line is that while the national economy is holding up fairly well, the worst is not likely over. We’ll see construction activity, especially for residential, decline further; we’ll see home values continue to fall; and the consumer at best is going to be a tough sell, requiring special occasions such as holidays or extraordinary low prices to prod them to open up their pocket books.