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Federal Reserve forecasts 2.55% GDP growth in 2013

Fed GDP ForecastEnlarge GraphThe Federal Reserve includes formal economic forecasts in the minutes from its Federal Open Market Committee (FOMC) meetings

The Federal Reserve typically releases a short press release after its two day FOMC meeting, with a general overview and its decision on interest rates. A month later, they release the actual minutes of the meeting which is much more detailed than the press release. Analysts will often compare the language between two consecutive releases in order to identify changes in the Fed’s perception of the state of the economy and monetary policy.

The Economic Forecast section of the minutes gives the Fed’s forecast for GDP, unemployment, and inflation for the next three years. It also provides the forecast from the previous meeting. The use of forecasts helps provide more granularity than the typical language of the Fed, which is often very general, and tells the analyst very little.

The Fed lowered its GDP forecast slightly downward in the March FOMC meeting

The Fed is forecasting from 2.3% to 2.8% in GDP growth for 2013, taking down the top end of the range from 2.3% to 3.0%. The Committee noted that the private economy was growing a little faster than anticipated, and that would nearly offset the fiscal drag imposed by the Jan 1st tax hikes and the sequester. They did adjust their 2014 and 2015 forecasts lower as well, although not dramatically.

The minutes showed less of a consensus about the appropriate time to end Quantitative Easing (QE) than the December meeting. During the December meeting, it appeared that a consensus was forming that QE would end sometime late this year, and the disagreement was over whether to end it in early Summer or early 2014.  The 10 year bond sold off in response, and yields jumped over 2%. This time, the range of opinions went from thinking that QE should end now to the opinion that QE should be increased. Making things more difficult, the Fed adjusted its forecast for GDP upwards, and its forecast for unemployment downward. Given the disappointing March jobs report, it looks like Quantitative Easing is going to last at least through the year.

Effect on home builders

Home builders, like Lennar (LEN), Toll Brothers (TOL) and KB Homes (KBH), are highly sensitive to the macro economy. As the economy expands, home buyers are more confident in their ability to take on larger financial risks (like a bigger home). Given that construction is such a big driver of economic performance, there is a bit of a chicken and egg effect going on, but it appears that construction will drive GDP and not the other way around.

Lennar and KB Homes have a November fiscal year, so they reported first quarter earnings last month. They noted large increases in orders and backlog. A difference of .1% in GDP is probably not enough to materially affect their results or housing demand, but conditions have been so depressed for so long in the home building sector that even a small improvement in GDP can have significant results.