Why the Economy Is Slowing

    The economy has been on a roller coaster ride the past few years. Lawrence Yun, the chief economist for the National Association of REALTORS®, points to two main reasons behind the latest slowing of the economy: Constrained homebuilding and business spending.

    Homebuilders have been slow to up their production of new homes. They’ve been plagued with labor shortages and a shortage of suitable land for development. They’re also facing new housing permit rules and new financial regulations on small-sized banks. All of these factors are contributing to an “abnormally sluggish homebuilding recovery in this cycle,” Yun notes in his column at Forbes.

    What’s more, this contraction in home building is contributing to an overall sluggishness in the economy, Yun says.

    Housing starts in March were about 1.09 million units at an annualized pace. While it is up 14.1 percent from a year ago, it’s still far from historical levels.  Normal activity is usually about 1.5 million housing starts a year. Yet, builders have been producing fewer than 1.1 million units since 2008. Prior to that, housing starts had not dipped below that level since 1981 and 1982, when mortgage rates were near 20 percent, and in 1991 when the economy was in a recession.

    “Had the housing starts rebound been like in past cycles – that is, quickly getting back up to 1.5 million new units – then broad economic growth would have been markedly stronger,” Yun notes in his recent column at Forbes.

    “With soft housing starts, GDP growth is similarly expected to be soft, barely above the zero growth line in the first quarter. … Had the economy moved along at the normal historical growth rate of 3 percent average annual GDP growth compared to what we actually experienced over this past decade, the typical American would have an additional $7,000 this year.”

    But homebuilding isn’t the only factor leading to a slowing economy. The economy also has been slowing due to “an unusual trend in recent years of business spending being below corporate profits,” Yun says.

    He explains: “For most of U.S. history, business spending (defined as the sum of spending for non-residential equipment and intellectual property products in GDP accounting) was higher than corporate profits. Borrowing, typically by new small businesses, had permitted more spending. That is, America always had more entrepreneurial ideas than money. But in recent years, ideas are apparently no longer in abundance and corporate cash is sitting on the sidelines and not doing much.”

    Yun notes that he believes an increase in homebuilding and business spending are key to getting the economy back on track.

    Source: “Two Major Reasons for Slow Economy,” Forbes (April 19, 2016)

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