Slower Growth Ahead as Impact of Higher Interest Rates Lingers in 2024

The recent strong economic growth rate of 4.9% in the third quarter, driven largely by consumer spending, is not sustainable, according to NAHB Chief Economist Robert Dietz. It will be difficult for consumers to maintain the same level of spending with credit card rates at around 25%. For that and other reasons, Dietz sees the U.S. economy slowing down to a growth rate of roughly 1% over the next two years.

Dietz spoke Dec. 12 during a webinar on the macro outlook for 2024. He was joined by Pro Builder Editorial Director Rich Binsacca for a status check on key macro issues affecting the economy and the housing industry. A replay of the 70-minute webinar is available on Pro Builder’s website. Also available is a PDF summary of takeaways from the webinar.

“Call it a ‘soft landing,’ call it a ‘rolling recession.’ We just had a period where the third quarter overperformed and now the lingering effects of higher interest rates are going to slow the economy moving forward,” Dietz said.

A potential headwind against future growth is government spending. “Right now we’re spending 2.5% of total GDP on interest rates on the federal debt and that number is going to rise to 5% in the coming years. Moving from 2.5% to 5% is the equivalent of adding the entire defense budget just to pay interest on the debt,” Dietz said.

“That is a huge problem,” he added. “But in the short term, this economy is proving more robust than I think many of us expected a year ago.”

Dietz noted that one of the first signs that inflation was about to rear its head occurred in 2021, when productivity and workers’ wages began to diverge. Earnings started outpacing productivity, while the goods and services produced in the U.S. economy were not increasing. That divergence was the biggest clue two years ago that the U.S. was moving into an inflationary environment.

Looking at the remodeling sector, Dietz noted that it is flat right now, but he anticipates growth going forward. The optimism rests in the anticipated growth for aging-in-place remodeling, the fact that people are moving less frequently and working from home more, and the need for investment in the nation’s aging housing stock.

Moreover, the remodeling market is growing in terms of overall market share, Dietz said. The sector’s share of total residential construction has grown from a third in 2007 to almost 40% today.

The webinar covered a wide range of economic issues, including inflation and interest rate expectations, building materials prices, workforce concerns, demographics and the cost of regulation. Dietz concluded with a look at the medium-term outlook for residential construction and a rough glance at 2030 and beyond.