Q&A with Lynn E. Browne Ph.D.
What is the impact of the slump in new home construction?
The sharp downturn in residential real estate activity has slowed U.S. economic growth but has not spilled over into other sectors. Most forecasters expect housing activity will continue to exert a drag on the U.S. economy through the first half of 2007 but do not think we will experience a recession. The outlook for Massachusetts is broadly similar to that for the nation.
Is non-residential investment also falling?
Business investment, non-residential investment, has been pretty strong. New orders, which are an indicator of where business investment is going, are rising pretty briskly, and business profits have been very strong.
What is the forecast for consumer spending?
Here, too, people are reasonably optimistic. Real disposable income is now growing quite briskly for several reasons: We have seen a decline in energy prices recently and also underlying trends are quite positive. We have seen pretty solid and steady growth in employment, and we have also seen rising [personal] earnings growth.
Is there any hint of a recession?
The consensus outlook for growth the next 12 months is continuing a pretty moderate pace, somewhat below what we enjoyed for the past several years because of that drag from residential construction, but still firmly positive and far from a recession scenario.
What the expectation for inflation?
With the inching up of the unemployment rate, the expectation is inflation will ease a little bit. Underlying inflationary pressures have been trending upwards and been somewhat worrisome. With the modest rise of unemployment rate from 4.4 to probably 5 percent, the expectation is that inflation will level off and edge back down again.
What’s your overall assessment of the economy?
In some ways, if you were not a builder or you were not a construction worker, you might characterize this scenario, or this forecast, as the best of all possible worlds, with a heavy emphasis on the positive. With the U.S. unemployment rate at 4.4 percent at the low end of what people consider to be full unemployment, with wages starting to pick up, with core inflation picking up and already in a range that some members of the Federal Reserve’s Federal Open Market Committee have characterized as uncomfortable, if we had continued to enjoy rates of growth of 3 percent or so, that inflation could have moved from uncomfortable to painful.
What about Massachusetts and the Cape Cod economy?
Barnstable County has done extraordinarily well in housing activity, which remained fairly strong in this period [2001-2006] and due to the absence of high tech manufacturing and computer science. Massachusetts has turned the corner. The past year, the growth has been pretty broad based. The unemployment rate in Massachusetts is currently 5.1 percent and in the Barnstable area it’s 5.2 percent.
The really good news for Massachusetts is income growth is quite strong.
The bad news for Massachusetts and for the nation is what is going on in housing. Price appreciation has really slowed by midyear 2006 from midyear 2005.
Is Massachusetts more vulnerable to a softening real estate market?
Some of the commentary seems to suggest that this is true, and I have my doubts.
Sometimes people give you the impression that what goes up must come down. That is simply not true in the case of housing prices. It is not the case if they went up fast then inevitably they will come down later. Usually what it takes to bring about a sizeable price decline is something else going wrong with the economy. Sellers are very reluctant to sell basically unless have to. If they still have their jobs, they may not have to.
Lynn E. Browne, Ph.D., is executive vice president and economic adviser at the Federal Reserve Bank of Boston. She presented this economic outlook to attendees at Cape Business Connect 2006, held November 17, 2006.
Originally published in the Jan/Feb 2007 issue of Cape Business.
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