July 12, 2007

Housing Woes Continue to Drag Down Economy

Nouriel Roubini says that the rest of the year looks like it will down from the first half.

The reason? Because consumer spending will continue to be under increasing stress and there isn't much to counteract the negative trends. Here's what he says are the factors that influence consumer spending:

Private consumption depends on a variety of factors; and most of these factors now point to further weakness in consumption spending for the rest of 2007. The main determinants of private consumption are:

  • Oil prices
  • Wealth effects of housing and size of home equity withdrawal
  • Interest rates and credit conditions in housing market and the consumer credit market
  • Consumer confidence
  • Real wage and income growth and labor market employment expectations

An analysis of all of these factors suggests that the weakness of real private consumption in Q2 will continue in the second half of 2007 and that consumption growth may actually further deteriorate in H2. Clearly oil and gasoline prices are now rising putting a dent on real disposable income; further, home prices are falling and home equity withdrawal is shrinking at a rapid rate; while we already see evidence of a credit crunch in the subprime sectors and in other components of the mortgage market; consumer confidence is weak and falling recently. So, the case for resilience of private consumption hinges on continued growth of real incomes now at risk because of high oil prices and continued strength of the labor market. But, as discussed below, the true conditions of the labor market are currently weaker than those suggested by the official employment growth figures. Thus, real income and employment growth are not as strong as the consensus makes them. Thus, most of the determinants of consumption suggest weakness ahead.

Bush's war on the economy is still going strong.

Posted by Mary at July 12, 2007 12:31 AM | Economy | Technorati links |