Since June 2009, economic activity has grown – but not robustly. 2  BIS Review 141/2010  In recent months, the momentum has slowed. After rising at a 3.25 percent annual rate during the second half of 2009, real gross domestic product growth has slowed. With demand growth barely keeping pace with firms’ ability to increase productivity, job creation has been too weak to significantly reduce unemployment, which stands today at 9.6 percent. And, as is typical in such circumstances of considerable slack, the rate of inflation has declined. Why are we experiencing this soft patch now? There are several reasons:   In its first year, this recovery – as is typical – benefited from firms replenishing their inventories. But this effect is now petering out.   The growth impulse from the 2009 fiscal stimulus package is beginning to wane.   The usual hand-off from inventory-led growth to private final demand is not yet fully established. Instead, we have ongoing sluggishness in two key sectors that have led past recoveries: consumer spending and housing. The slow recovery of consumer spending and housing in the face of very substantial monetary and fiscal stimulus reflects the painful unwinding of the dynamics at work during the expansion that preceded it. Beginning around 2003, underwriting standards for residential mortgages were significantly relaxed, leading to a sharp rise in household borrowing and in home prices.
The rise in home prices helped support more borrowing as households used lines of credit and second mortgages to tap into their rising home equity. This also fueled a strong boom in home construction. But house price increases could not be sustained without limit. When home prices peaked and started to turn down, the dynamic linking house prices, credit and consumption went into reverse. Let’s consider first what this means for consumption. Consumption of goods and services rose at a slow 2 percent annual rate over the first half of 2010 and with no sign of a rebound. Several factors are inhibiting families from spending, including: job or income losses, low confidence and declines in wealth as real estate and stock prices dipped. Households have been saving more and paying down their debts. Of course, lenders have also reinforced this tendency with tightened underwriting for credit relative to prerecession standards. Have households completed their deleveraging, so they will soon spend more? Although we believe that substantial progress has been made, it is hard to tell how much further this process has to run. Now, let’s consider why housing market activity – both new construction and sales – remains depressed. One reason for this is that many existing homes stand vacant. We estimate that there are roughly 3 million vacant housing units more than usual. This stock of vacant homes will shrink when foreclosures fall and more empty homes are sold or rented out.