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PHIL~DELPHIA
I.
MORTGAGE BANKERS' ASSOCIATION
March 13, 1978
"II
Introduction
A.
I'd like to talk about where the economy is headed
during .the next year or so and what that's likely to
mean for ·housing.
B.
I'd also like to speculate about some longer-run
developments facing financial institutions, especially
thrifts.
II.
Economic Outlook
A.
The basic question is:
Is the current expansion aging
•"
and likely to expire late this year or early 1979?
If the answer is yes, we're headed for recession.
If
the answer is no, the economy will continue to expand.
B.
The most recent batch of numbers are definitely bearish.
..l!.
1.
Factory output down 9 percent.
2.
New orders down 3 1/2
3.
Retail sales down 3 percent.
4.
Housing starts down nearly 30 percent.
5.
Leading indicators down 23 percent.
6.
I wouldn't put much weight ·in these numbers.
pe~cent.
,.t
Basi-
cally they reflect the long coal strike and bad
weather.
Spring will come
an~
Much more distressing is the recent acceleration of
inflation.
Wholesale prices began accelerating last fall.
The latest consumer price hike of 9 percent, unhappily,
could easily be repeated in the coming months.
,I
the strike will end,
and then these numbers will be distorted on the upside.
C.
I
I
:
-2My guess is this new burst of inflation is only partially
caused by weather and strike.
Other factors include
higher social security taxes, higher minimum wage, and
the decreasing value of the dollar in foreign exchange
markets.
enough.
Business and consumer confidence are fragile
Add a new round of inflation and a new round
of deteriorating confidence could easily ensue.
D.
A brighter picture of the economy emerges, however, if
we look at the basic spending elements in the economy.
1.
Consumers--personal income,
the wherewithal for
most spending in the economy, is on an upward
trend.
Last year it grew 10 percent,
this year
We do expect
we expect it to grow 11 percent.
more savings this year (6 percent instead of 5 percent last year) and consumer debt levels, while
not dangerous, may bring on even more hesitation to
occur additional debt.
(Both mortgage and consumer
debt-burdens are approaching, but _still below, the
last
cycli~al
highs.)
All in all, though, the growth
in consumer spending likely
~ill
be only a little
under last year's sizable gains, in part because
autos aren't doing as well.
2.
Business investment--has been on the sluggish side in
this recovery, but did pick up nicely last year.
Business fixed investment grew 8 1/2 percent in 1976
and grew 14 1/2 percent last year.
My guess is we
may not do as well this year, but we may come close.
-3Contracts
fo~-
new plant and equipment are 1/3 above
year ago levels at latest count and construction contracts for commercial and industrial buildings again
appear to be on an upswing.
3.
Then there is government spending.
The Federal
deficit, running near $60 billion, is quite large
so late in a business
~ecovery.
But foreign demand
has been weak and believe it or not state and local
governments have.been running surpluses (not in
Pennsylvania, apparently!).
4.
So, adding up these basic sources of demand--consumers,
business, and government--the basic outlook is for
an economy growing only a little less than last year
{4 1/2 percent in 1978 vs. 5 percent in 1977).
That's
about right for this stage.of the business cycle.
This is more or less what the conventional forecast
is.
E.
How do I
balance these various factors--the fairly good
shape of basic demand sectors vs. the ominous cloud of
more inflation and further eroding confidence.
I
1.
Here's how
come out.
The first quarter will look weak because of weather and
the coal strike.
2.
The second quarter will be quite strong as the economy
snaps back.
Some of this snapback
streng~h
will
likely spillover into the third quarter.
3.
Absent a tax cut, I
going into 1979.
think the economy will weaken
Although too early to say there
-4would be a recession in 1979 without a tax cut,
there's a good chance a recession would occur.
4.
My guess, however, is~~ have a tax cut on
the books by early"l979 and will escape a recession.
III.
Housing
A.
The typical pattern for housing in a recovery
is to show strength until choked off by hig'h
interest rates and disintermediation.
The con-
ventional view is that interest rates will rise
further and so disintermediation will cut into
housing as 1978 progresses.
Some mortgage bankers
think disintermediation will be a serious problem
with another 25 basis point hike in short-term
rates; others think another 100 basis points will
be needed.
B.
My judgment is that housing will hold up better
than might be expected.
1.
The thrift industry has learned how to live
better through high interest periods.
One
mortgage banker told me recently that his
firm.has sacrificed profitabil~ty to maintain
liquidity for the period ahead.
2.
Longer-term maturitieshave helped stabilize
funds.
3.
Government support programs and borrowing faci1ities are improved
4.
Mortgage rate ceilings are less inhibiting.
-55.
More importantly, however,
is the view among
ordinary people that home ownership is the best
inflation hedge and best tax shelter going for
them.
Despite higher prices
an~
high starts, vacancy
rates are now the iowest in this expansion.
The
demographics of regional shifts, shifts within
urban areas, household formation,
two-income
families all underscore the strong underlying demand for housing.
With inflation, it's the best
investment around.
That's a force to be reckoned
with.
6.
For two years running, housing starts have jumped
30 percent.
Clearly with the kind of financial en-
vironment we're in this year, starts aren't going to
rise and some drop can be expected.
is I
think we'll all be pleasantly
What I'm saying
sur~Tised
how
small (perhaps 5 percent to 1.9 million down from
2 million in 1977) the drop will be.
IV.
Longer Run
A.
Housing is something special in our society, it goes beyond
economics.
Owning a piece of land with some brick and
mortar on it goes to the heart of the American dream.
B.
As a consequence, special arrangements for the financing
of housing have evolved.
The whole thrift industry with
its privileges and restrictions cater to housing.
C.
Market-place forces in time usually chip away at government efforts to interfer with the laws of supply and demand-whether those efforts are for good or ill.
D.
Th~s,
some thrift institutions want to be like com-
mercial banks and consumers wonder why they shouldn't
be able to be paid interest on their demand deposits
or get top dollar for their savings at the same place
they keep their checking account.
NOWs, NINOWs,
Hence, we have
telephone transfer, proposed automatic
transfers, etc. etc.--in effect, a homogenizing of
financial institutions.
E.
Consumers say they want this,
economists say it's
great, some bankers (thrift and
co~ercial)
join in,
and the regulators and Congress for the most part
cooperate.
I
might add others disagree, some in this
room.
F.
Nonetheless, my forecast is
trend will continue.
the parade.
that this homogenizing
Not everyone
wi~l
have to join
There will continue to be room for diversity
and .specialization.
It seems to me your best approach is
to develop your own niche, where you can do what
yo~
can
do best.
G.
It also seems to me that the thrift industry (and I
might add some commercial banks) have served well the
special place we afford housing in our society.
Will
the trend toward homogenization help or hurt housing?
Frankly, it's too early to tell.
My reading is one way or
another housing will continue to get special treatment.
Therefore, I'm optimistic about the longer-run outlook
for housing and I'm also confident you'll adjust to the
rapidly changing ·thrift environment.
-7V.
Let me close with some thoughts about monetary policy.
We have a new
Chairma~
and our job won't be easy in the
coming months.
A.
If I'm right about the economic outlook, both the
possibility of recession in 1979 and higher inflation will dominate the thinking of policymakers
in the months ahead.
B.
Faster money supply growth will be bad
~OT
inflation
and higher interest rates will be bad for recession.
C.
Our job in the Fed will be to balance these two.
Fiscal policy will give us
avoid recession, but I
a familiar one for the Fed.
I
help to
doubt if we'll get much help
in fighting inflation •.. The
D.
substantia~
in£1ati~~-£igher
box is
(Thoughts on Miller.)
think the Fed has to meet its responsjbility and do
what it can to lean against the winds of inflation.
But in meeting our responsibility, we have to be
tempered--tempered because monetary policy is only
one limited economic lever, tempered because the recovery needs to continue, and tempered because new
jobs need to be created.
'
I
I
@FedFRASER