THE Federal Reserve Board forecast this week that there will be no recession in the United States in the foreseeable future. It says the gross domestic product will grow by as little as 1.6 percent in 2008, but is confident that growth will accelerate after that.
That forecast — the first formally issued by the Fed in line with its effort to be more transparent — was released the same day that the Census Bureau reported a continued slowing of housing starts. The number of new homes being built is now little more than half the level of two years ago.
If the Fed is right, and the economy does stay out of recession, with the unemployment rate barely rising at all, then it will be the first time ever that a housing slowdown this severe has not coincided with a recession. In fact, there has never been a slowdown of anything like this magnitude until after a recession was under way.
The minutes of the October meeting of the Fed’s open market committee, which were released along with the forecast, conceded that there was a risk of a downturn. “Participants were concerned about the possibility for adverse feedbacks in which economic weakness could lead to further tightening in credit conditions, which could in turn slow the economy further,” the minutes reported.
The Fed said there was also a risk from “a more severe contraction in the housing sector and a substantial decline in house prices.”
But Fed officials also concluded that “in recent decades, the U.S. economy had proved quite resilient to episodes of financial distress, suggesting that the adverse effects of financial developments on economic activity outside of the housing sector could prove to be more modest than anticipated.”
As the accompanying charts show, the decline in housing starts has been rapid and sudden, particularly for single-family homes. Such violent swings were more common decades ago, when increases in short-term interest rates could shut off deposits for savings and loan institutions. At the time, the savings and loans were limited by law from raising deposit rates too far. That made mortgages hard to get until rates came down.
Falling home prices and tougher lending standards may be having a similar effect now.
The second chart shows two-year changes in home starts, again measured by three-month moving averages to smooth out weather-related distortions. The rate of new-home starts from August through October — as the mortgage crisis took hold — was down 47 percent from the same months of 2005.
Since the early 1960s, when the data became available, there have only been three previous cycles when starts fell by at least a third over two years. By the first month with such a decline in each of those cycles — January 1974, March 1980 and January 1991 — a recession was under way.
There have been recessions without such a large impact on housing, most notably the 2001 downturn. But the housing market has never done this poorly without a recession starting.
