ABA Sees Housing Market Stabilizing

WASHINGTON D.C. — The U.S. economy will see continued moderate growth through 2008 as the housing market stabilizes, according to the American Bankers Association Economic Advisory Committee.

The committee agreed that the drag from homebuilding will fade and that overall economic growth will pick up through the end of this year and into 2008.

"The U.S. economy remains resilient," reported Scott Brown, EAC chairman and chief economist of Raymond James and Associates Inc, St. Petersburg, Fla. "Residential home price declines could deepen, especially if mortgage rates continue to climb, but the drag on the economy should lessen as the year comes to a close."

The group said it expects more moderate consumer spending growth for the remainder of this year, reflecting in part the recent rise in gas prices.

However, the committee said it anticipates limited additional spillover from the soft housing market into other sectors of the economy.

"We don't expect the current weakness in housing to put a serious dent in consumer spending, but it remains a key downside risk that bears watching," said Brown.

The EAC forecasts that the national economy will grow at an annual rate of 2.1 percent in 2007 and 2.9 percent through 2008. However, committee members differ in their views about the risks to the economy.

On the downside, some members were concerned about the possibility of a greater spillover from the housing market, particularly in an environment of rising long-term interest rates.

On the upside, some members believe GDP growth will be much faster, as the economy quickly absorbs the worst of the housing problems.
Other factors that could boost GDP include a rebound in the manufacturing sector and robust global growth.

Reflecting these differences in perceived risks, there was a wide variety of views about the timing and direction of possible Federal Reserve interest rate changes.

The majority of the committee believes that core inflation will recede enough to allow the Federal Reserve to cut interest rates 25 basis points by the first quarter of 2008 as the unemployment rate moves higher.

"The biggest risk to this outlook for interest rates is that core inflation will remain stubbornly high against a backdrop of accelerating growth and tight labor markets," Brown noted.

The EAC said it expects core CPI inflation to settle at just above 2 percent next year. Interest rates should remain relatively stable, with a slight steepening of the yield curve, according to the committee's forecast.

Members of the ABA Economic Advisory Committee include:

Scott Brown, EAC chairman and chief economist of Raymond James and Associates Inc., St. Petersburg, Fla..

—Scott Anderson, senior economist, Wells Fargo Bank, Minneapolis.

—Peter Hooper, chief economist, Deutsche Bank Securities, New York.

—Dana Johnson, chief economist, Comerica Bank, Detroit.

—Bruce Kasman, chief economist, JPMorgan Chase, New York.

—Paul Kasriel, chief economist, Northern Trust Co., Chicago.

—Kei Matsuda, senior economist, Union Bank of California, San Francisco.

—Gregory Miller, chief economist, SunTrust Banks Inc., Atlanta.

—George Mokrzan, senior economist, Huntington Bancorp, Columbus, Ohio.

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