The U.S. Economy Keeps on Booming

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The U.S. Economy Keeps on Booming

When a natural disaster practically wipes a major city off the map — at least temporarily — it should be expected to have a catastrophic effect on a nation’s economy. But although there was a Katrina-induced fourth-quarter lull, there is no question that the economy is once more surging.

Three broad themes are at work here:

First, growth in productivity, encouraged by sound tax and fiscal policy, has driven this boom and will continue to do so this year.
Second, labor costs will remain manageable because of productivity growth, allowing the cycle to continue with low inflation.

Third, wage incomes will rise, making strong consumption growth sustainable.

To begin with, housing starts are still strong after peaking at a 30-year high in January. However, as the Associated Press reported on March 24, “a 10.5 percent drop in new home sales in February followed a 5.3 percent decline in January and was the biggest drop since a similar 10.5 percent fall in April 1997.” Sales of new homes fell in three of the four preceding months to an annualized sales rate of 1.08 million units, the slowest pace since May 2003.

But this negative was largely offset by the positive news, March 23, that sales of previously-owned homes actually rose by a stronger-than-expected 5.2 percent in February, reversing five straight monthly declines. Consistent with forecasts by the Trends editors, it appears that “sales of both new and existing homes peaked at new all-time highs in 2005; a fifth consecutive annual record.” Based on this data and other factors, the Trends editors now forecast total home sales will decline this year, as the housing boom slows, and essentially plateau for the next several years.

However, the message from the housing market is: there’s no reason to panic. As explained in prior issues, a reversion back to trend-line appreciation will primarily have the effect of making housing more affordable. Consistent with this forecast, the Associated Press also reported that, “The slowdown in sales was putting pressure on prices. The median price of a new home sold last month dropped to $230,400, down by 1.6 percent from January and off 2.9 percent from February 2005.”

The Trends editors expect home prices nationally to fall 10 percent from the 2005 peak by 2010. But, with the average house affordable to just 6 percent, 4 percent, and 2 percent of the consumers in New York City, San Diego and Los Angles, respectively. this price drop should hav a positive impact on home ownership prospects for many...

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