Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
A Look at the Perilous Psychology of Financial Market Bubbles - 25th Sep 20
Corona Strikes Back In Europe. Will It Boost Gold? - 25th Sep 20
How to Boost the Value of Your Home - 25th Sep 20
Key Time For Stock Markets: Bears Step Up or V-Shaped Bounce - 24th Sep 20
Five ways to recover the day after a good workout - 24th Sep 20
Global Stock Markets Break Hard To The Downside – Watch Support Levels - 23rd Sep 20
Beware of These Faulty “Inflation Protected” Investments - 23rd Sep 20
What’s Behind Dollar USDX Breakout? - 23rd Sep 20
Still More Room To Stock Market Downside In The Coming Weeks - 23rd Sep 20
Platinum And Palladium Set To Surge As Gold Breaks Higher - 23rd Sep 20
Key Gold Ratios to Other Markets - 23rd Sep 20
Watch Before Upgrading / Buying RTX 3000, RDNA2 - CPU vs GPU Bottlenecks - 23rd Sep 20
Online Elliott Wave Markets Trading Course Worth $129 for FREE! - 22nd Sep 20
Gold Price Overboughtness Risk - 22nd Sep 20
Central Banking Cartel Promises ZIRP Until at Least 2023 - 22nd Sep 20
Stock Market Correction Approaching Initial Objective - 22nd Sep 20
Silver Bulls Will Be Handsomely Rewarded - 21st Sep 20
Fed Will Not Hike Rates For Years. Gold Should Like It - 21st Sep 20
US Financial Market Forecasts and Elliott Wave Analysis Resources - 21st Sep 20
How to Avoid Currency Exchange Risk during COVID - 21st Sep 20
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Dot.com Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Will U.S. House Prices Drive The 4.8% “Consensus” Nominal GDP Growth Forecast?

Economics / US Economy Jul 28, 2010 - 03:03 AM GMT

By: Andrew_Butter

Economics

Best Financial Markets Analysis ArticleI looked up the “consensus” for nominal US GDP growth in The Economist today; you have to add “real” to “CPI” to get the answer  - I’m not interested in “real”, for me “real” is what they measure (nominal), and the un-reality starts when they subtract whatever weird and wonderful concoction of inflation is handed down by the Bureau of Labor.


Anyway the “consensus” was 4.8% for 2010, although USA Today surveyed 47 top economic forecasters, and their consensus worked out (nominal) at about 3.7%.

http://www.usatoday.com/money/economy/2010-07-26-econsurvey26_ST_N.htm

All this consensus building is making my head spin, and I’m reminded of John Maynard Keynes’ quote about laying economists head-to tail all round the world and never being able to find a consensus. I’m also wondering how many of the current batch of consensus seekers had reached a consensus that house-prices would go on going up forever in 2005 and 2006? Or are these new consensus seekers?

Anyway, the reason I was interested was because nominal GDP is a driver for most of my models, so I was messing around, and then I noticed this:

That’s quarterly data from Q1-2000 to Q2-2010; the “X” axis (left to right) is the average quarterly change in house prices of the preceding two years, and the “Y” axis is the average quarterly change in nominal GDP in the subsequent three quarters.

That says from 2000 to now, the main driver of nominal GDP in USA was house prices (up and down).

Uh…Duh!!  Yeah OK, we all know that the current malaise was primarily due to the fact that USA had a housing bubble and then it had a bust, so that’s hardly NEWS!!

I acknowledge that’s not very complicated, just one variable plotted against another variable, but it does appear to suggest some sort of cause and effect; like if house prices change, then following that…nominal GDP changes.

But it was a bit of a surprise that you can explain 84% or so of the changes in nominal GDP from the change in house prices in the preceding two years (Oh and don’t fret about the “S” curve (approximated by a third-order polynomial), that’s a perfectly normal relationship; logically a total collapse of hose prices would make everyone dead broke, and an explosion upwards would make everyone so rich that nominal GDP would explode upwards too.

The story of “why” doesn’t have to be particularly complicated either.

When people saw the price of their houses go up, they felt rich, so they didn’t bother to save for the future, and some of them even borrowed money to “unlock” some of the equity that they (thought) they had in their houses; and THEN they went out to get a bit of “Retail Therapy” to reward themselves for their “efforts”.

70% of the US economy is consumer spending, and so like in the old days when they used to say “What’s good for GM is good for America”, all you do is substitute “GM” with “Shoppers”.

And then when house prices went down; they didn’t feel so rich anymore and more to the point their friendly mortgage shark wasn’t around to let them “unlock” some more equity, in fact the shark was being a mite unfriendly and was offering to kick them out of their “equity”.

The interesting thing there is that the “fundamental” for house prices (that’s the line the bubble and the bust oscillates round) is driven by Nominal GDP per house divided by a function of the 30-Year yield, and…and this is the interesting part, the 30 year yield is driven by nominal GDP.

So there is a sort of feedback loop operating there.

A stabilising feedback that operates is that longer term, is the international competitiveness of an economy is a function of the absolute cost of shelter per person; that’s why countries that have sensible policies on house prices and go with the “novel” idea that to make housing “affordable” to ordinary working people, it’s much better to make sure that the prices of housing for them is kept low, rather than setting up complicated ways of lending them money so they can buy very expensive houses they can’t afford.

That’s why the economies of Germany, Hong Kong and Singapore are so “resilient” (all three of those countries have the idea that the role of the government is to make sure that ordinary people have decent, affordable housing, regardless of what the real-estate sharks would like); and why countries that let house prices for ordinary people get out of control (like USA and UK), are so “un-resilient”; and make it their speciality to export jobs.

What’s next for the USA Economy?

Well the Good News is that house prices won’t go down (much) more, about 12% by my estimate.

http://www.marketoracle.co.uk/Article21334.html

The trend-line down will probably be about 1% per quarter over two years; looking at the chart, that works out at about 1% nominal GDP growth per quarter (actually it averages 4.8% going forward three years).

The other good news is that housing in USA now is cheap, which means that ordinary people can afford to live there now, and that unless the Administration makes a concerted effort to shoot themselves in the foot again (their speciality – look at Iraq and Afghanistan), jobs ought to start drifting back.

Two points, the first is that the model says nothing about how much of that 4.8% is inflation, and inflation is a complex issue. Right now since USA still imports a lot of its needs (oil in particular), it’s at the mercy of events outside USA that it cannot control.

The second thing is that it’s hard to see how, long-term, USA can afford to spend the amount of money that it does on playing Rambo-Chasing-Evildoers; that expenditure is inflationary and it’s unnecessary. The BIG threat to the security ordinary Americans is going broke, it’s not a bunch of raggedy lunatics planting IED’s and building one or two nuclear bombs on the other side of the world, and it never was.

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2010 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules