In an address about the economic outlook in the United States and monetary policy at the Economic Club of New York this week, New York Fed President and CEO Bill Dudley praised the progress housing has made during the economic recovery but refused to offer his views on whether the Fed would raise the short-term interest rate in December.
Dudley stated at the onset of his speech that he would not address the topic of whether the “normalization” process would commence at the Federal Open Market Committee’s next meeting (its last of 2015) in mid-December. He said his view on whether or not the Fed will raise rates depends on how the incoming data influences his assessment of more improvement in the labor market and his confidence that inflation will return to the Fed’s 2 percent target rate.
The weak advance report on Q3 GDP growth (1.5 percent, compared to 3.9 percent in Q2) and the weakness of the manufacturing sector have caused some concern among many that the U.S. economy is losing forward momentum, Dudley said.
But there are many positives to offset those negative economic metrics, one of which is housing, according to Dudley.
“In particular, domestic demand continues to grow at a solid pace as increases in consumer spending, housing and business fixed investment all contributed to the third quarter’s 2.9 percent annualized gain in real domestic final sales,” Dudley said. “A large decline in the pace of inventory accumulation was the main reason why real GDP growth faltered in the third quarter. Because the contribution to growth from inventory investment can be quite volatile on a quarter-to-quarter basis, the growth in real final sales probably provides a better sense of the state of economic activity than does the GDP figure.”
The fundamentals supporting domestic demand have been solid—consumer spending has increased supported by real income gains, and household net worth is rising—and housing fundamentals have been solid as well, according to Dudley.
“Housing prices are rising and the constraint on growth in residential investment now appears to be more on the supply side, as building contractors struggle to mobilize the resources needed to construct more homes,” Dudley said. "The National Association of Home Builders’ index rose in October to the highest level since late 2005. While the housing indicators will likely continue to be volatile on a month-to-month basis, I expect the gradual improvement in the housing sector to continue.”
Dudley also noted the importance that the forward momentum the jobs market picked up in October persists. The well-below-expectations jobs reports in August and September caused many to speculate that the labor market was faltering—but 270,000 jobs were added in October, about 50 percent higher than expected.
“Those concerns should be at least partially put to rest given the strength of the October employment report, recognizing that the employment news can be volatile on a month-to-month basis,” Dudley said. “Most noteworthy to me are the strong payroll employment gains in October and the solid 0.3 percent rise in aggregate hours worked. Over the past three months, payroll gains have averaged 187,000 per month, not much below the average payroll growth of 213,000 per month during the first half of 2015.”
"Given persistently low wage and price pressures, and the relatively slow real GDP growth forecast in the SEP, a more gradual path of normalization may be necessary to ensure reaching the 2 percent inflation target," Rosengren said.
Click here to read Dudley’s full speech.
Click here to read Rosengren’s full speech.