If you know how many months there are in a “considerable time,” you will know exactly when Janet Yellen and her colleagues on the Federal Reserve Board’s monetary policy committee plan to begin raising interest rates. If not, you can add your guess to those of professional Fed watchers who are predicting the date will fall somewhere between early 2015 to mid-2016.
In fact, the Fed’s adherence to its “considerable time” language is the least interesting news to come out of this week’s Fed meeting. More interesting is the central bank’s latest prediction. The Fed’s economists expect real GDP growth to total 2.1 percent this year, 2.8 percent next year, 2.75 percent in 2016, and 2.4 percent in 2017, before settling into a “longer run” rate of 2.15 percent.
Those growth rates are hardly high enough to set pulses pounding in anticipation, and are more likely to have set teeth gnashing in some policy circles in Washington, circles in which rapid growth is seen as a cure for a multitude of ills, ranging from a low labor-force participation rate to rising inequality. They represent a lowering of earlier forecasts, which proved excessively optimistic, and in my view ignore the growth prospects for major sectors of the economy. Consider, for example, the housing sector, which recorded a 14.4 percent decline in August. Home builders know that most of that fall was accounted for by the volatile multi-family sector, and that even the low August figure was up 8 percent above last year’s. So they remain cheerful.
The index of homebuilders’ sentiment rose this month to a level not seen since 2005. Goldman Sachs Kim Dawsey notes that Goldman has found the index “to be a decent leading indicator for housing starts….We expect a solid positive contribution to GDP growth from residential investment in Q3.” With reason. Americans overwhelmingly believe that a home is a good investment. But 53 percent think their income is too low, and 41 percent say their credit isn’t good enough to qualify for a mortgage. That might be changing. Pulte, a major builder, reports that sales of its lower-priced homes, in the $200,000 range, rose 29 percent and 26 percent in the first and second quarters, respectively, compared with last year.
At the high end of the market, Toll Brothers (average price of homes it recently delivered is $732,000) reports increases of 53 percent and 36 percent in revenues and number of homes sold, respectively, compared with its third quarter last year. And sales of previously owned homes, the bulk of the market, climbed steadily during the summer. Lawrence Yun, chief economist with the National Association of Realtors, says, “We are in a multi-year housing recovery.”
That is not to say all is clear sailing for this key industry. Interest rates are likely to rise; young people saddled with debts from student loans, and with incomes (adjusted for inflation) that remain 6 percent below 1989 levels, are lingering on their parents’ couches, rather than starting new households; shortages of skilled construction labor are holding back the industry’s growth; the slow pace of the recovery and continued uncertainty favor renting rather than buying. Despite such negatives, the overall outlook for the housing sector has to be considered sunny, with spotty clouds.
So, too, for the auto industry. Sales are booming, helped at the end of the current model year by traditional discounting. There is a reason that firms such as Mercedes are expanding their manufacturing facilities here. The average age of the 253 million cars and light trucks on our roads is 11.4 years. It should be no surprise that consumers find new cars -- more fuel-efficient, more gadget-laden, safer -- attractive. With their balance sheets in better shape than they have been for years, consumers are willing and able to borrow at the fastest pace in almost eight years in order to finance their new-car yen. The cloud on this horizon is Uber, which the industry fears young urbanites will find a substitute for car ownership.
Finally, there is the oil industry. The development of the technologies for fracking and for horizontal drilling have made America the world’s largest energy producer, and driven oil and gasoline prices down, with more price cuts likely. That’s the equivalent of a massive tax cut, freeing up hundreds of millions dollars of purchasing power for everything from new iPhones to cars and home improvements. Exports of oil products and, soon, natural gas, will cut into the trade deficit. And cheap natural gas is attracting foreign investment and creating jobs in America -- not as many as advocates of “in-sourcing” claim, but a significant number.