'Bomb Cyclone' Chills US Economic Growth, Impacts Homebuilding

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Key macroeconomic indicators support the view of a modest expansion in the US economy, as cold weather conditions and the uncertain outlook on inflation have put restraints on GDP growth projections.

Kristian Rouz – Several weeks of anomalous cold weather have restrained US residential construction, producing the largest monthly decline in homebuilding in December. This could somewhat negatively affect Q4 GDP growth; however, the solid labor market and modestly growing inflation support the expectations of  modest economic expansion.

Construction activity in the residential real estate sector decreased as cold weather disrupted single-family home building last month. According to a report from the Commerce Department, housing construction dropped 8.2 percent to a seasonally adjusted 1.192 million units, while November’s home sales figures were revised up to 1.299 million units from the 1.297 million units previously reported.

This reflects some strength remaining on the demand side of the market, as borrowing costs are still affordable. According to  data from Bloomberg, the 30-year fixed mortgage rate is currently 4.28 percent, compared to the Federal Reserve’s base interest rates at 1.25-1.5 percent, an inflation rate of 2.1 percent in December.

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The decline in homebuilding last month might further hamper the supply side this year, pushing home prices up. This, coupled with the projected continuous increase in credit costs, could further impair housing affordability, and hurt the demand for homes.

“Housing starts were held down by the cold winter weather but should bounce back quickly in coming months as the country warms up from this recent cold spell,” Chris Rupkey of New York-based MUFG said.

The anticipated rebound in residential construction could, however, offset affordability concerns, particularly, outside the overvalued markets in the Tri-State area (New York, New Jersey, Connecticut) and California.

A separate report from the Federal Reserve supports a modestly optimistic view of the economy, suggesting the seasonal challenges – such as cold weather – won’t have a lasting impact on the pace of GDP expansion.

The Fed emphasised that some structural weakness in the economy still persists, but the Trump administration’s ongoing deregulation and fiscal stimulus efforts are likely to ease downward pressures by boosting the disposable incomes and purchasing power of US consumers.

“Most districts said that wages increased at a modest pace,” the Fed’s Beige Book report read. “A few districts observed that firms were raising wages in a broader range of industries and positions since the previous report.”

Several regional monetary regulators observed improvements in construction (particularly, in the commercial real estate sector) and manufacturing, as well as gains in infrastructure input costs. The Fed expects further increases in wages this year, but its outlook on inflation remains cautious.

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In a yet another report, the Labor Department said unemployment claims declined by 41,000 to 220,000 in the second week of January, the lowest since February 1973. Officials stressed the ongoing improvement in the labor market supports the view of sustainable economic expansion this year.

The report painted a more optimistic picture than expected, as economists had previously forecast jobless claims to retreat to 250,000 after a slight increase in the previous weeks.

Meanwhile, the economy has started feeling the lack of a qualified workforce, as the unskilled migration from across the southern border does not cover the needs of most industries.

“Employers are increasingly facing a mismatch between their hiring needs and the availability of qualified candidates to fill those needs,” Jim Baird of Kalamazoo, Mich.-based Plante Moran Financial Advisors.

This as  Social Security is running out of money to support the generous welfare benefits for low-income families, who often cite their inability to find gainful employment – in a full-employment labor market, with jobless rate at 4.1 percent.

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