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MBA Economic/Mortgage Finance Commentary: Cliff Avoided, Growth Continues

Kan, Joel
Despite steps to avoid even larger tax increases for most U.S. households, growth in the first half of 2013 is still expected to be slow as the effects of the payroll tax increase and spending cuts from sequestration or a similar decline in government spending kicks in.

Moreover, there is the potential for financial market disruption if the debt ceiling increase is not approved in a timely fashion. Consumer spending, particularly on durable goods, along with a housing market recovery that is gathering speed, are the main sources of growth at this point.

Following December’s Federal Open Market Committee meeting statement, there have been a few speeches by Fed officials, all of which have reaffirmed the Committee’s view that rates will remain exceptionally low until more solid improvement is seen in the labor market and broader economy. However, release of minutes from the December meeting surprised the financial markets, as it showed that most FOMC members favored curtailing the Fed’s asset purchase programs by the end or even the middle of 2013. Longer-term interest rates increased as a result, including mortgage rates.

Nonfarm payroll employment in December grew by 155,000 jobs, short of the 200,000 job per month growth some Fed officials have indicated would be a signal of significant, sustained labor market improvement. Despite the December gain in payrolls, there was no improvement in the unemployment rate, which remained unchanged at 7.8 percent.

The unemployment rate, which has been in the range of 7.8 percent to 7.9 percent over the last four months, remains at its lowest levels since 2009. However, labor force participation rate has been low as well, holding at 63.6 percent, and has been below 64 percent for all of 2012, the lowest levels seen since 1983. The U6 measure of underemployment was unchanged at 14.4 percent.

Within the categories that make up this rate, workers who have sought temporary work for economic reasons fell sharply again in December, the third straight decline, but workers who are marginally attached to the labor forced or who are discouraged in their job search have increased significantly for two months.

While the headline numbers painted a positive picture, underlying trends showed that labor market conditions are still weak and workers are not yet returning to the labor force. Job growth is proceeding slower than expected, and clearly lower than what is needed for sustained and significant improvement in the unemployment rate. Our outlook is that the unemployment rate will decrease in 2013, as job growth continues to grow but as the workforce shrinks as demographic factors outweigh the effect of any new or returning workers to the labor force.

Industrial production and capacity utilization showed slight improvement in December, but growth in utilities production was slower than expected at this time of the year. The Institute for Supply Management’s manufacturing index was stronger in December, reversing November’s indication of contraction, and most of the index components showed slight improvements, except for production and inventories.

U.S. housing remains as one of the few bright spots, with home sales continuing on an upward trend, purchase applications showing small but steady year over year growth, and refinance activity starting to rebound after a holiday-driven dip. Most notably, December housing starts reached the highest level in four years, with both single-family and multifamily starts finishing 2012 with significant increases. Single-family starts saw a 23 percent increase in 2012 while multifamily housing starts increased 38 percent for the year. This trend is likely to continue into 2013 as housing permits also continued on a healthy upward trajectory.

We have not received any data to significantly alter our originations forecast this month. Our applications data point to a first quarter 2013 that is essentially unchanged for home purchase and slightly weaker for refinances, relative to the fourth quarter 2012. We estimate that mortgage originations totaled $1.7 trillion in 2012, and will decline to $1.4 trillion in 2013 as rates rise and refinance originations fall. Purchase activity has shown gains relative to a year ago, for seven straight months.

The origination forecast is based on expectations of very modest increases in economic growth in 2013 relative to 2012, but growth nonetheless. We expect gross domestic product to rise 2.0 percent in 2013 after seeing 1.8 percent growth in 2012, about equal to the growth rate in 2011 but well below the 3.1 percent growth rate we saw in 2010. Personal consumption expenditures will slow in early 2013 as households adjust to slightly higher tax burdens, but should start to increase more rapidly toward the end of 2013 and keeping that course for 2014.

We expect that growth through 2014 will be around 2.5 percent, which is expected trend growth in this economic climate. The unemployment rate will decrease slowly, moving to 7.6 percent in 2013 and 7.0 percent in 2014, as labor force participation remains low and job growth remains in the 150,000 jobs per month range.

(Joel Kan is director of research and business development with the Mortgage Bankers Association. He can be reached at