By David F. Seiders The U.S. economy was flirting with recession prior to the terrorist attacks on Sept. 11, and the housing sector was losing some momentum as well. Shock waves from the attacks certainly will put additional downward pressure on the economy and the housing market, at least over the balance of this year. But the chances for a substantial rebound in 2002 and 2003 are quite good, particularly for the housing sector where transactions lost in the short term generally are regained down the line.
The seriousness of the near-term economic situation will depend partly upon steps taken by economic policymakers at home and abroad. But developments on the political, military, and security fronts are even more important to both the U.S. economy's short-term and long-run vitality. Economic shocks can probably be shaken off quickly if the country remains united behind our political leaders, if our military initiatives appear to be productive, and if homeland security is restored.
The NAHB's forecasts assume that major terrorist attacks in the United States are behind us, that forthcoming military initiatives yield some success, and that popular support is maintained for the administration's efforts to combat terrorism around the globe. These conditions are essential to restoration of consumer and business confidence and revival of the industries that took the most direct hits from the terrorists--particularly airline and travel-related industries. Restoration of confidence also is critical to recovery of the decimated stock market and large parts of the financial services industries.
The NAHB's forecast for the overall economy shows small declines in real GDP in both the third and fourth quarters of this year, and that could qualify as an official recession. Even so, this should be a brief and mild setback, and all the fiscal and monetary policy stimulus in the pipeline should help propel economic growth above 4 percent by late next year. In this scenario, the nation's unemployment rate gets up to 5.7 percent by the second quarter of next year before receding later in the year. Inflation remains benign throughout the forecast period.
Everything considered, some weakening of housing market activity is inevitable in the wake of the terrorist attacks, particularly in late 2001 and early 2002. The heaviest impact should be in the fourth quarter of this year, when our post-attack forecast for total housing starts is 13 percent below our pre- attack forecast. The two forecasts converge as 2002 goes along and are virtually the same by late next year, and 2003 now looks like a better year for housing than before the attacks. On an annual basis, we're looking for 1.574 million housing starts in 2002, up modestly from an estimated 1.554 million in 2001.
In recognition of the housing sector's durable demographic foundations, we've raised our housing starts forecast for 2003 by 50 thousand units (above the pre-attack forecast) to a hefty 1.684 million units. Housing's solid investment aspects should also bolster demand and production in the years ahead, as memories of the 2000-2001 stock market debacle linger on.
It must be recognized that we are in uncharted waters, and current forecasts for the economy and housing have unusually wide "confidence" bands around them. All bets are off if we are attacked again (or poisoned or infected with disease), if a "holy war" engulfs much of the world, or if the flow of oil from the Middle East is seriously disrupted. Barring such disasters, the resilience of the U.S. economy, aided by our policymakers, should carry us through.