Housing Slump Seen Weighing on Economy

Monday January 1, 6:37 pm ET 2007
By Martin Crutsinger, AP Economics Writer

Analysts Say Housing Slowdown That Hit U.S. Economy Will Persist Into 2007

WASHINGTON (AP) -- The slowdown that hit the U.S. economy will persist into 2007 as the once red-hot housing market continues to suffer through a serious correction, analysts say.

As the new year begins, many private analysts are forecasting the economy will perform at the slowest pace in five years, a full percentage-point lower than growth in 2006.

One such analyst is Nariman Behravesh, chief economist at Global Insight, a forecasting firm. "The recession in the housing market does not seem to have had much of an impact on the consumer," he said. "The bad news on housing has been offset by good news on wages, jobs and the stock market."
While the slowdown will cause the unemployment rate to rise, economists remain hopeful that the economy will remain on track to achieve the Federal Reserve's hoped-for "soft landing." That is described as a scenario in which growth slows enough to dampen inflation but not trigger a recession.

But there are plenty of risks that could make the landing more bumpy -- everything from another surge in oil prices to a more severe collapse in housing, which could rattle consumer confidence. At the moment, though, economists like Behravesh and David Wyss of Standard & Poor's of New York feel there is only a one-in-four chance that the current slowdown will turn into an actual recession.

The reason for the optimism is that American consumers, while buffeted in 2006 by record-high gasoline prices and a slumping housing market, have kept spending, helped by a solid jobs market.

Consumers were also helped by a retreat in gasoline prices from record highs above $3 per gallon last summer.
The relief in energy prices has given consumers money to spend on other items, and this has meant that consumer spending, while slowing in 2006, did not collapse.

The overall economy, as measured by the gross domestic product, expanded in 2006 by 3.3 percent, many economists believe, just slightly above the 3.2 percent GDP growth of 2005.

That increase reflected a surge at the start of the year as the economy rebounded from the impact of the 2005 Gulf Coast hurricanes and much slower growth starting in the spring, as consumers were hit by rising interest rates, soaring energy prices and the slumping housing market.

For 2007, Global Insight is forecasting a GDP growth rate of just 2.3 percent, a full percentage point lower than in 2006. That would be the slowest pace since the economy grew by just 1.6 percent in 2002, a year when the country was struggling to recover from the 2001 recession.

The slower growth means that unemployment will be rising, with many analysts expecting the jobless rate to hit 5 percent in 2007, up from a five-year low of 4.4 percent in October. That would still be a relatively low overall civilian jobless rate in historical terms.

For certain sectors of the economy, job losses will have a much bigger impact, however.
Economists at Goldman Sachs estimate that housing-related industries -- construction, furniture manufacturing and sales, real estate agents, mortgage brokers -- will see more than 1 million jobs evaporate over the next two years because of the housing slowdown after five boom years for sales.

The auto industry also is expected to suffer as U.S. car companies complete announced plans to trim their work forces in the face of stiff foreign competition.

Troubles in auto-related industries have already contributed to recession-like conditions in many parts of the industrial Midwest while many southern states are confronting job losses as a result of a surge of Chinese imports of textiles, clothing, paper and furniture.

For most of the country, however, the economic slowdown won't have much of an impact as long as there are no unexpected shocks that could send growth lower than forecast.
"Betting that nothing goes wrong could turn out to be a bad bet," said Wyss, Standard & Poor's chief economist. "It wouldn't take much of a disruption in the Middle East to send oil prices back up again."

Economists believe that the nationwide impact of higher layoffs will be held in check by the Federal Reserve, which will move starting in the middle of the New Year to counter rising unemployment by cutting interest rates to boost economic activity.

By that time, economists expect inflation will have retreated back into the 1 percent to 2 percent Fed comfort zone for prices excluding food and energy. The latest reading had these prices rising by 2.2 percent, year over year, in November, down from a 2.4 percent increase in October.

If the Fed succeeds in its soft-landing goal, many economists believe the stage will be set for a solid rebound to a 3 percent-plus GDP growth rate in 2008 and beyond. That would resemble the pattern of the mid-1990s, the last time the Fed succeeded in bringing about a soft landing for the economy.

"I think 2008 will turn out to be a very good year for the economy," said Mark Zandi, chief economist at Moody's Economy.com. "The Fed will feel more comfortable with stronger growth because inflation will be under control."