Slump Ahead As Housing, Credit Crisis Worsens

Source : The Business Times, September 29, 2007

Market strength put to test as consumer confidence dips to 2-year low in Sept

(WASHINGTON) The double whammy of a worsening housing slump and a credit crunch is punching the US economy in its gut. That's likely to mean a period of slower activity in the months ahead.

Further gloom: The housing mess is set to drag on well into 2008, meaning the sector will still be the biggest thorn in the economy's side

If lucky, the economy will not be knocked over. But the country could be in for a bruising that will put the economy on weaker footing.

The latest sign of the deteriorating housing market came on Thursday. New-home sales tumbled in August to the lowest level in seven years. The credit crunch has made it harder for some would-be buyers to obtain financing.

Prospective buyers trying to get 'jumbo' mortgage loans - exceeding US$417,000 - have been especially stung; financing for that segment of the market had really dried up in the late summer.

'A lot of people are on the sidelines,' said David Seiders, chief economist for the National Association of Home Builders.

Manufacturers and other businesses are feeling the ill effects of the housing and credit problems. Demand for costly manufactured goods, such as cars, appliances and machinery, plunged in August by the largest amount in seven months, the government reported on Wednesday.

And, individuals' anxieties are growing. Consumer confidence sagged to a nearly two-year low in September, the Conference Board reported earlier this week.

All this ratchets up fears that people and businesses might cut back on spending and investing, which would hurt economic growth. A severe cutback could throw the economy into a recession.

'The big question is: Does all the craziness in the financial markets because of credit and housing problems change the behaviours of consumers and businesses?,' said economist Ken Mayland, president of ClearView Economics. 'The biggest dangers are that consumers and businesses clam up.'

The National Association for Business Economics says it believes growth in the third quarter - the period from July through September - slowed to a pace of around 2.4 per cent. It predicts the growth rate in the final three months of this year will be around 2.5 per cent. Others think growth will turn out to be weaker than those projections - in the range of a 2 per cent pace or less.

If any of those projections prove correct, it would mark a considerable loss of speed for the economy.

Economic growth clocked in at a relatively brisk 3.8 per cent pace in the April-to-June quarter, its strongest showing in just over a year. The improvement, however, occurred before the credit crunch took a turn for the worst later in the summer.

To help cushion the blows to the economy, the Federal Reserve last week slashed a key interest rate by a bold half percentage point. Economists predict another rate cut will come in October and possibly again in December.

The Fed's aim is to induce people and companies to spend and invest more. Even if it does, it will take months for that to show up in revitalised economic activity. Housing's problems are expected to drag on well into next year, meaning the sector will continue to be the biggest thorn in the economy's side.

Whether the employment climate gets better or worse will be an important factor in how the economy fares in the months ahead.

On that front, a small glimmer of light appeared on Thursday poking through all the gloom. The Labor Department reported that fewer people signed up for unemployment benefits last week. New claims fell last week to 298,000, a four-month low.

For now, even with the hope that the job market won't crumble, analysts believe it will soften. The unemployment rate by year's end is expected to climb to around 5 per cent.

Fed chief Ben Bernanke and his predecessor Greenspan have repeatedly spoken of the economy's resilience.

The last recession in the United States - in 2001- was mild despite blows from the bursting of the stock market bubble, the terror attacks and a wave of accounting scandals that rocked Wall Street.

That resilience is getting tested again. -- AP