By David Pendered
Rajeev Dhawan had the good fortune Wednesday to see a prediction he made in the morning be proven true that afternoon, when the Federal Reserve telegraphed that a rate hike is likely in December.
The Fed released minutes of its October meeting. They show solid support among central bankers for a rate hike in December.
Dhawan, director of the Economic Forecasting Center at Georgia State University, made his prediction at the Economic Forecasting Conference. The morning event marked the release of Dhawan’s quarterly forecast.
“Barring any setback in the domestic stock market, the October jobs report almost seals the deal for a December hike,” Dhawan wrote in his quarterly “Forecast of the Nation.”
Dhawan predicts the Fed will approve another rate in March 2016. He doesn’t expect an additional hike until after the presidential election in November 2016, due to the campaigning and also the small margin of error for stalling the economy.
“Rate hikes are intended to slow, not stall, the economy,” Dhawan said. “With a potential GDP growth rate of 2.0 percent, there is little margin for error.
“How aggressive the Fed is and how high it will go depends on private fixed investment performance in coming quarters,” Dhawan said.
Meanwhile, Atlanta Fed President Dennis Lockhart said at a conference in New York that he is prepared to support a rate hike December, according to a story reported by reuters.com.
“I am now reasonably satisfied the situation has settled down,” Lockhart was quoted in the story, referring to the global financial turmoil in August. “So I am comfortable with moving off zero soon, conditioned on no marked deterioration in economic conditions.”
Dhawan contends that rate hikes can stimulate the economy. One of their advantages, he said, “is that they bring fence-sitting, first-time home buyers into the market.”
Dhawan expects housing starts to rise to 1.287 million units by 2017.
This is a considerable uptick in housing starts compared to the seasonally adjusted annual rate of 1.06 in October, according to a report released Wednesday by the U.S. Commerce Department.
The October figure represents an 11 percent drop in housing starts, compared to September’s revised estimate of 1.19 million starts. The October rate is about 11.2 percent below the October 2014 rate of 1.079 million starts.
The steepest decline was the 25.1 percent drop in multifamily units, apartments for rent and sale, that has been a major force in the recent economic picture. Starts of single family homes, which comprise well over half the market, fell by 2.4 percent nationwide.
The South recorded the deepest dip in the latest report. Starts in the South are down 18.6 percent, followed by the West, which dropped by 16.2 percent.
On the bright side, and speaking to Dhawan’s prediction, new applications for building permits rose 4.1 percent to a seasonally adjusted rate of 1.15 million. The number of applications was up in every region except the Northeast.
Here are verbatim highlights of Dhawan’s national economic forecast:
- After growing only 1.5 percent in the third quarter of 2015, real GDP is expected to grow 2.7 percent in the fourth, for an annual rate of 2.4 percent. It will expand at 2.6 percent in 2016 and 2.4 percent in 2017.
- Business investment will grow by 3.2 percent in 2015, rebound to 5.2 percent in 2016 and 4.4 percent in 2017. Expect jobs to grow by a monthly rate of 214,000 in 2015, 182,000 in 2016 and 155,000 in 2017.
- Housing starts will average 1.112 million units in 2015, rise to 1.212 in 2016 and 1.287 in 2017. Expect auto sales of 17.3 million units in 2015, 17.0 in 2016 and 16.5 in 2017.
- The 10-year bond rate will rise to 2.32 percent in 2015 and should rise to 3.57 percent before the end of 2017.