2003 Forecast Bright

Economic Forecast is Bright for 2003

During our January 22 Forecast Night last month, Dr. Anthony Chan, Ph.D., Senior Managing Director & Chief Economist, Banc One Investment Advisors, provided an analysis of 2002 economic conditions and predictions for the market in 2003...

The economy seemingly stood still in 2002.  At the outset of the year, consumer spending was healthy, capital spending was weak while the housing market remained resilient.  One year later, those themes remain largely intact: consumer spending and housing market activity remain relatively healthy, capital spending is still relatively weak and the economic recovery remains slow and tenuous.

As a result, the economy grew in 2002, albeit at a relatively subdued pace.  With much of the data already available for all of 2002, our projection calls for average yearly real GDP growth of 2.4% followed by a growth rate of 2.8% in 2003.   It is important to note that if the expansion began in January 2002, as we suspect, such growth is clearly below trend since our research reveals that growth in the first year of an economic expansion has averaged approximately 3.7%.  

However, we believe that there are real fundamental reasons pointing towards a continued improvement in growth in 2003 and that this slow economic recovery will mature into a much more solid, sustainable expansion.  Perhaps the most encouraging development last year was the long-awaited small recovery in business spending.  In the year ahead, a continued economic recovery is likely to be supported in part by the prospects of the passage of a third federal stimulus since George W. Bush became President and a gradual improvement in corporate profits.  Given these trends, we also believe that the continued recovery in capital spending will also pave the way towards firmer growth during 2003. 

Of course, while business spending has been in the doldrums in recent years, consumers have continued to spend as if the economy never slowed.  Strength in consumption spending went a long way in keeping the recession short and shallow, but it has also been instrumental in keeping this recovery modest.  Because consumption never slowed dramatically, pent-up demand never built up and spending didn't accelerate as it typically does coming out of recession.  But while we can't expect consumer spending to lead an overall economic acceleration anytime soon, we do look for spending to remain in positive territory due to mostly healthy consumer confidence readings.

On the housing front, we expect that housing prices will continue to rise in 2003, albeit at a slower pace than was observed during 2002.   Although many analysts have been complaining of a potential housing bubble, we remain confident that the low supply of available housing will prevent such a development.  Specifically, we take great comfort in knowing that the national supply of houses available for sale today are about half of what was available during the 1990 to 1991 economic downturn.   

Nonetheless, we are also realistic in our overall assessment and do realize that the state of the national and local housing market is always tied to the state of the respective labor market.  Consequently, to the extent that the Columbus area unemployment rate has consistently hovered below the national unemployment rate we remain cautiously optimistic for the Columbus area housing market environment for 2003. 

Nonetheless, with the contraction in the number of jobs created nationally in 2002, we believe that any expansion in the national and local housing market in 2003 will remain limited.  Moreover, as the Federal Reserve begins to raise short term rates, it is hard to believe that much of the current housing activity that is being fueled mostly by lower mortgage rates rather than real fundamental factors is not likely to be curtailed.      

Within this environment, we project that the Conventional Mortgage Price Index for the Columbus area will rise by no more than 2.5%in 2003 compared to a rise of approximately 4.0% in 2002.  Using the consensus forecast for the Columbus area population growth rate of 0.8% and a projected rise of 3.5% in household income for Columbus residents, we project that the Columbus area housing market will enjoy a year of subdued but positive market activity in 2003.

Against this backdrop, we believe that the major restraining factor for local area housing market growth will be a steadily deteriorating interest rate environment over the next two years.  At the time of this writing, the 30-year mortgage rate stood around 5.9%.   Our forecast expects that the Federal Reserve may raise short-term rates by 25 basis points or keep them unchanged in 2003.  However, in 2004, we project that the Federal Reserve is likely to raise short-term rates more aggressively, perhaps by as much as 100 basis points.   Such actions suggest that the 30 year-mortgage rate is likely to end the 2003 calendar year at 6.25% and then move upward toward 7.50% through the end of 2004.  With these higher rates in place, housing will have to depend on other factors other than lower mortgage rates to fuel its continuing growth.