Last month, the Federal Reserve voted unanimously to raise the interest rate to 0.75%. It was the first rate increase since December 2015, and this time around they suggested they will raise rates three more times in 2017 to reach ~1.5%.
This is a clear sign that, in their view, the U.S. economy is strong. Let’s take a look at a few of the key metrics of the economy.
Gross Domestic Product
In October, Real GDP was expected to rise by 1.6% during the four quarters of 2016, and recent estimates indicate an even higher 1.7-1.8% increase for 2016. In 2017, GDP is forecast to increase 2.2%, as seen in the graph below.
The U.S. economy has expanded for seven years, even though the pace of growth has been slow. We are not in the 3% range, as we had seen in the past, since consumer and business confidence have yet to make a big jump, but the expectations are for positive growth now that we have somewhat passed the election uncertainty.
The unemployment rate release in November was 4.6%, the lowest level since 2007, and this was one of the main reasons the Fed felt comfortable raising interest rates. Since October 2009, the unemployment rate has been cut by more than half, declining 0.7 percentage points in 2015 and falling below its pre-recession average.
In fact, the U.S. has added jobs for 74 consecutive months. In 2017 and 2018, the expectation is for it to remain stable in the 4.7% range.
For 2016, inflation, which is measured by the consumer price index (CPI), will be around 1%. With the drop in oil prices, inflation was basically nonexistent in 2015 and is forecast to slowly rebound to above 2.0% in 2017, as you can see in the graph below.
The Fed’s long-term objective is to keep inflation in the 2% range, and this was the second main reason they decided to raise rates. They will continue to closely monitor inflation as they make their decisions in 2017.
What Does this Mean to Construction and Housing?
According to Lawrence Yun, Chief Economist at the National Association of Realtors, "Despite these moves [short-term rate hike], mortgage rates will not rise alarmingly. By this time next year, expect the 30-year fixed rate to likely be in the 4.5 percent to 5 percent range.”
With mortgage rates increasing we might see a softening in the housing market, but it should be minimal. With a strong economy, the increase effect will be balanced off by stronger consumer and business confidence.
Overall, construction will likely experience more benefits from a stronger economy than shortfalls from increased interest rates.
In the new year, we'll follow up with more detailed forecast analysis. If you want to get a head start and dive into the data today, download the 2017 Construction Forecast report.