April 28, 2008
HP-950

Statement for the Treasury Borrowing Advisory Committee
of the Securities Industry and Financial Markets Association

Washington, DC--Economic growth slowed considerably in the first part of 2008, with consumer and business spending affected by the housing downturn, credit market disruption, and the impact of high energy prices.  These headwinds are expected to be offset in part by the stimulus payments and investment incentives enacted in February as part of the Economic Stimulus Act of 2008.  Even so, the U.S. economy is likely to grow at a rate below trend and the labor market to remain soft throughout the year.

Real GDP grew at an annual rate of just 0.6 percent in the fourth quarter of 2007, and data released so far indicate that growth remained quite sluggish in the first quarter of 2008.  The advance estimate of first quarter GDP will be released on April 30.

Household spending has been affected by a weaker job market, declining wealth from housing and equity markets, and rising energy costs.  Real personal consumption expenditures were flat in February after having risen only slightly in January.  Together with lackluster retail sales in March, it appears likely that consumer spending slowed considerably in the first quarter from the 2.3 percent annual rate posted in the fourth quarter. 

Labor market conditions deteriorated in the first quarter after the job market had broadly slowed in the second half of 2007.  The unemployment rate reached a 2-1/2-year high of 5.1 percent in March, after averaging 4.6 percent over 2007.  Nonfarm payrolls fell by about 77,000 per month on average in the first quarter – the first quarterly decline in payrolls since August 2003. 

Housing market indicators point to another large decline in real residential investment in the first quarter, following a drop of 25 percent at an annual rate in the fourth quarter of 2007.  Housing starts fell to a 17-year low in March, with starts of single-family homes down by 63 percent from the January 2006 peak.  Sales of new single-family homes also fell to a 17-year low in March and existing single-family home sales in March were near the lowest point in the past 10 years.  Prices for purchased homes edged up slightly in February according to figures from the Office of Federal Housing Enterprise Oversight (OFHEO), but remained 2.4 percent lower than a year earlier.  Other measures such as the Case-Shiller indices indicate as well that home prices are declining in most major U.S. cities.  Widespread weakness in the housing data reflects the fact that the U.S. is undergoing a necessary housing correction following years of what were, in retrospect, unsustainable house price increases. 

Housing appears likely to subtract a full percentage point or more from growth in 2008 after taking off nearly as much in 2006 and 2007.  Inventories of unsold homes are at historically high levels, building permits remain well below starts, and homebuilder optimism is close to an all-time low.  Mortgage delinquencies and foreclosures are projected to rise further in 2008; the additional foreclosures will slow the process of working through the inventory overhang and in turn put additional downward pressure on home prices. 

Business investment growth appears to have slowed in the first quarter of 2008 from the 6 percent pace in the fourth quarter of last year.  Shipments of nondefense capital goods excluding aircraft--a key input into equipment and software spending in the national income and product accounts--rose 1.2 percent in March, partly retracing February's 1.6 percent decline.  Private nonresidential construction declined for three consecutive months through February.  Tighter credit conditions are likely to affect business spending going forward.

Export growth remains a bright spot in the outlook.  Real exports were up 8.4 percent during the four quarters of 2007, the second straight year of more than 8 percent growth.  Data for early 2008 suggest that export growth remains strong.  Real imports rose by 1 percent over the four quarters of 2007.  Nominal data through February suggest that import growth accelerated in the first part of 2008, with much of the increase reflecting the rising value of petroleum imports.  The wider trade deficit through February means that net exports are likely to add less to first-quarter real GDP growth than was the case in the second half of 2007, when trade contributed more than 1 percentage point to real GDP growth.

Headline inflation has picked up with energy and food prices, but measures of core inflation remain contained.  Overall consumer price inflation reached 4 percent in the twelve months ending in March, up from 2.8 percent a year earlier.  Energy prices started to climb rapidly last fall, with the front-month futures price of light sweet crude oil topping the $100 per barrel mark for the first time in February and averaging above $117 per barrel in late April.  Food prices are up 4.5 percent over the year ending in March, up from food price inflation of 3.3 percent a year ago.  Despite the pickup in headline inflation, core inflation remains within the narrow range that has prevailed over the past four years.  The core consumer price index, which excludes food and energy prices, rose 2.4 percent over the year ended in March, compared to 2.5 percent a year ago.  Rising inflation eroded the 3.6 percent increase in nominal average hourly earnings and meant that real wage growth turned negative in late 2007, with real wages down by 0.6 percent through the 12 months ending in March.

Economic growth appears to have remained sluggish in the second quarter to date, with the labor market deteriorating further.  Initial claims for unemployment insurance have continued to rise, with the four-week average of new claims up to around 370,000 in mid April from an average of 351,000 in the first quarter.  Consumer sentiment fell to a 26-year low in April, and homebuilder confidence remained near a record low.  Regional measures of manufacturing activity point to broadly flat factory activity in April.

The Economic Stimulus Act of 2008 will provide an important boost to GDP in the second half of the year: more than $150 billion in payments to individuals and business tax relief this year, with the first payments going to consumers this week.  These stimulus payments are expected to provide significant support to household and business spending in the middle of the year. 

Other policy actions of the Administration have been aimed at helping individual homeowners affected by the housing market downturn.  These include measures to help increased numbers of families to refinance their mortgages into fixed-rate products guaranteed by the Federal Housing Administration (FHA); since August, FHA has helped more than 170,000 homeowners refinance.  The Administration has also worked with the HOPE NOW Alliance on measures being taken by private lenders to prevent avoidable foreclosures in cases where borrowers have the desire and financial wherewithal to afford their home in a more suitable mortgage product.  These efforts have produced meaningful results: HOPE NOW announced in April that about 1.2 million struggling homeowners have received either a loan modification or repayment plan since July 2007 to help them stay in their homes.  Preventing avoidable foreclosures limits further increases in the inventory of unsold homes, which would otherwise extend the housing correction.  Legislative action on FHA modernization and GSE reform would assist additional homeowners and strengthen the financial sector and thus the overall U.S. economy.

In sum, the economy faces strong headwinds, as the housing correction, high energy prices, and strains in financial markets will continue to weigh on growth through 2008.  Tax rebates and investment incentives in the Economic Stimulus Act of 2008 will support consumer and business spending in the middle of the year.  A resumption of strong and sustainable growth, however, requires that the U.S. economy work through the corrections in housing and credit markets.

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