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Despite Q1 GDP Contraction Housing and Economy Outlook Remain Positive

Recession-RecoveryIn its second of three estimates of real gross domestic product (GDP) growth for the first quarter released Friday, the U.S. Bureau of Economic Analysis (BEA) issued a downward revision of what analysts had already deemed "paltry" growth of 0.2 percent in the advance estimate for Q1 reported at the end of April.

According to the BEA's second estimate for Q1, which is based on more complete source data than were available for the advance estimate, the GDP contracted at an annual rate of minus 0.7 percent. Despite economic growth taking a step backward, the forecast for housing for the rest of the year remains positive, according to Fannie Mae SVP and chief economist Doug Duncan. New home sales increased by 6.8 percent in April up to 517,000 annualized units; the National Association of Realtors' Pending Home Sales Index has risen by 14 percent in the last 12 months; existing home sales are at a nine-year high; and purchase applications recovered at the end of May from a slow first half of the month up near a two-year high.

"Housing indicators look good," Duncan said. "Pending home sales, new home sales, and starts look good. An underlying number in the GDP, the gross domestic income, was positive. And the confidence numbers seem to be doing well (the Conference Board's Index rose 1.1 points up to 95.4 in May). The GDP seems to be inconsistent with the underlying trend line."

The contraction of GDP in the first quarter was largely driven by negative contributions from exports, nonresidential fixed investment, and state and local government spending. Positive contributions from personal consumption expenditures, private inventory investment, and fixed residential investment partly offset the aforementioned negative contributions. Also contributing to the GDP's contraction was an increase in imports, a subtraction in the calculation of GDP.

One more estimate for Q1 GDP growth will be coming out at the end of June, but economists such as Duncan are already looking ahead to Q2.

"People looking at the data for the second quarter are predicting that it's going to be around 2 percent," Duncan said, adding that he expects the GDP growth to continue on a modest path in Q2 and by the end of the year achieve the level of Fannie Mae's original forecast for the full year of 2015, which was an annualized rate of 2.6 percent.

While the downward revision of April's already weak advance estimate was disappointing, housing is still a bright spot in the economy, according to Freddie Mac deputy chief economist Len Kiefer.

"While the tracking data signaled a weaker GDP reading, it’s still discouraging to see it and to see the economy struggle with the same reoccurring first quarter story for the past few years," Kiefer said. "Overall, we estimate real GDP will grow 2.3 percent in 2015, revised from a 2.6 percent growth previously estimated. The one silver lining in the GDP numbers was residential construction was boosted to a 5.0 percent pace from the prior 1.3 percent showing that housing is beginning to contributor more to the overall economy."

The real GDP grew at an annualized rate of 2.2 percent in the fourth quarter of 2014 and 2.4 percent for the entire year.

About Author: Seth Welborn

Seth Welborn is a Harding University graduate with a degree in English and a minor in writing. He is a contributing writer for MReport. An East Texas Native, he has studied abroad in Athens, Greece and works part-time as a photographer.

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