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By David F. Seiders Senior Staff Vice President Chief Economist National Association of Home Builders

close to neutral as long as inflation is around the 2.3Vo rate we forecast.

We expect the long-term mortgage rate to gravitate upward to only 7.2Vo by late this year and to approach'7 .l%o by late next year.

rnHE economic recession that began I in the U.S. in March 2001 aPParently has been over for several months, although the National Bureau of Economic Research is not yet prepared to declare a lower turning point for the cycle.

Regardless of the exact timing, it's clear that the loss of economic output during this recession was extremely mild while corporate profits and the stock market took heavy hits and job losses were substantial.

Even though U.S. economic growth surged in the first quarter of this year (to 5.67o), the early stages of the budding recovery do not display characteristics of an economy that is embarking on a robust, self-sustaining growth path. A massive reduction in the rate of inventory liquidation by business firms gave a huge, but inherently temporary, boost to first quarter growth while final demand for goods and services produced in the U.S. was rather weak. Spending by businesses on capital equipment and nonresidential structures continued to head downhill, and the trade balance continued to deteriorate. The labor market also continued to deteriorate through the first quarter, as another magical surge in productivity growth allowed a surge in output growth with less labor input!

In view of all the sobering news on the economy, it's obvious that the key to economic recovery/expansion lies with the nonresidential business sector. Corporate profits, the stock market, and capital spending and hiring by the business sector must improve. For this process to come together, c.e.o.s must change from the extremely cautious belt-tightening syndrome to a more expansive attitude that will gen- erate the growth that economists insist is appropriate and achievable.

Corporate profits are the key to sustained improvement in the stock market, capital spending and hiring. Unfortunately, it's difficult to identify a rebound in corporate profits that will satisfy c.e.o.s and stock market participants alike, particularly in view of the growing number of accounting scandals that have been infecting psychology. A seemingly endless string of disappointing earnings reports, dismal year-over-year calculations for the S&P 500, and incredibly complicated profit numbers from the GDP accounts have left market participants afloat in a sea of confusion.

Early this year, Federal Reserve chair Alan Greenspan stressed, "The broad contours of the present cycle have been. and will continue to be, driven by the evolution of corporate profits and capital investment." The Fed held short-term rates steady and maintained a "balanced" assessment of inflation/recession risks at a May Federal Open Market Committee meeting, while noting the recent kick to economic growth from the massive swing in inventory investment and stressing the uncertain nature of final demand over coming quarters.

The Fed's positioning, along with the spate of recent data that call into question final demand, have prompted us to shift our forecast of the first Fed rate hike further into the future. We expect the Fed to embark on a monetary policy "neutralization" process at the November 6 FOMC meeting and to raise the federal funds rate by only 50 basis points (to 2.25Vo) by yearend. We're looking for a 4.257o ftnds rate by late next year. That should be

NAHB's forecast for growth in real GDP averages about 3.57o ovet the second half of this year and in 2003. That's hardly exciting for the early stages of a business cycle expansion, but it should be enough to work the unemployment rate down to about 5.3Vo by late next year. Inflation is quite benign in this forecast, showing only a modest rise in 2003.

The housing component Production of GDP (residential fixed investment) provided positive contributions to economic growth throughout most of the recession and in the first quarter of this year. However, there have been some substantial differences in the performance of, the various components ofthe housing sector.

The single family housing market has been the strongest component, driven by low interest rates and powerful increases in housing prices, and the nation's homeownershiP rate has moved up in the process. Residential remodeling also has been strong, as homeowners have tapped huge capital gains through refinancings and other means for home improvements.

The multifamily sector has been a victim of the success of the single family sector, as large numbers of households have vacated their apartments in favor of homeownership and left excess supply in rental markets.

The mobile home market apparently has bottomed out, following the collapse from its peak in 1999.

The housing outlook remains solid for the balance of the 2002-2003 forecast period, in the context of a recovering economy and a reasonablY friendly interest rate environment. The single-family market and remodeling should be strongest, while multifamily is likely to taPer down.