The economy will continue to grow in 2007 at a moderate pace, according to the leading indicators we track.

The economy will continue to grow in 2007 at a moderate pace, according to the leading indicators we track. Our eight leading indicators show a mix of signs:

  • Above-average growth will occur: 1) ECRI’s leading economic indicator index, and 2) corporate profits

  • Average growth will occur: 1) Manpower’s Net Employment Outlook, 2) 12-month stock market returns, and 3) Institute of Supply Manager’s index (indicator of purchasing activity by companies)

  • Below-average growth will occur: 1) Conference Board’s leading economic indicator index, 2) yield curve, and 3) crude oil prices

While some have mentioned the possibility of a recession, it isn’t generally showing up in the leading indicators. Continued economic growth will be the key to a housing recovery.

Our grading system of the economy and the housing market is a “bell curve” model, with statistics at an all-time high receiving an “A,” statistics near the long-term average receiving a “C,” and the worst times ever receiving an “F.” In this grading system, it is OK to be a “C” student.

Here is our current report card:

Economic Growth: C
The U.S. economy continues to expand at a moderate pace. Real gross domestic product (GDP) increased at an annual rate of 2.5 percent in the fourth quarter of 2006, according to final estimates. In addition, employers added more workers than forecast in March, and the unemployment rate now stands at a five-year low. As such, many top-tier investment banks adjusted their Fed rate-cut forecasts to later in the year. Year-over-year retail sales and personal income growth rose during the month, while core inflation — as measured by the Consumer Price Index (CPI) — remained flat.

Leading Indicators: C-
In March, the yield curve reversed its inverted status for the first time since July 2006. Interest rates decreased across the board, with the 10-year Treasury rate six basis points higher than the 2-year rate. All of the major U.S. stock indices regained some of the losses experienced in February, but continue to decline year-over-year. Corporate profits decreased $4.9 billion in the fourth quarter of 2006, versus an increase of $61.5 billion in the third quarter. Subprime worries and a lackluster start to the spring selling season are reflected in the S&P Super Homebuilding Index, which dropped for the second consecutive month in March, and is now 32 percent below its year-ago value. Oil prices spiked again in March, driven by geopolitical tension surrounding Iran’s seizure of British military personnel.

Mortgage Rates: B
For the sixth straight meeting, the Federal Open Market Committee held the fed funds rate at 5.25 percent. The 30-year fixed mortgage rate declined to 6.16 percent in March, while one-year adjustable rates also dropped to 5.43 percent. Adjustable-rate loans continue to decrease as a percentage of total loans, with ARMs falling to 20.2 percent of total loan activity in the last week of March. Consumer delinquencies combined with subprime lender bankruptcies continue to keep the ABX index — which measures the risk of owning bonds backed by home-loans to people with poor credit — very low.

Consumer Behavior: C+
All of the major gauges of consumer confidence fell in March, with the consumer confidence index declining to 107.2, the lowest level since November 2006. The consumer’s perception of the overall economy is likely being influenced by higher gasoline prices, recent stock market volatility and declining home prices.

Existing-Home Market: C+
Existing-home sales increased unexpectedly to 6.69 million annualized units in February. On the down side, inventory levels, a vital indicator in today’s oversupplied market, rose to 6.7 months. Prices increased sequentially, but remain 1.5 percent below year-ago levels. The pending home sales index increased in February, though it remains well below the peak levels witnessed in 2005.

New-Home Market: C-
In February, new-home sales declined 18 percent year-over-year to an annual rate of 848,000, the lowest monthly pace of sales since August 2000. With the decline in sales has come a subsequent uptick in months of supply, currently at 8.1, which is the highest level since January 1991.

Housing Supply: D+
Housing starts increased to a seasonally adjusted annual rate of 1.52 million in February. While this represents a 9 percent increase from a low January figure, it is a 28 percent year-over-year decline. Building permits, which are a leading indicator for housing, declined 2 percent sequentially in February, and are down 29 percent year-over-year to a seasonally adjusted annual rate of 1.53 million.

John Burns is the founder of Real Estate Consulting in Irvine, Calif., which monitors changes in real estate market conditions and provides consulting services, including strategic planning, market research and financial analysis. He can be reached at jbrec@realestateconsulting.com.

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