Housing May Be The Foundation For The Economy's Future in 2007
Tuesday, December 26, 2006JEFF YASTINE: So now that we've had one view of where the stock market is going in 2007, the next question is where the economy is going. Investment pro's have been looking into their crystal balls and predicting what will happen with the Federal Reserve, interest rates and other components of the economy. As Erika Miller reports, experts say there's one key factor that could cause trouble all around.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: 2007 is only a week away and economists are sharply divided on whether there will be growth or recession next year. The answer, they say, depends on what happens to the housing market. Pessimists worry the sector has fallen into a deep freeze, making consumers nervous about their finances. If the situation worsens, the bears fear consumers will slash spending, perhaps pushing the U.S. into recession. But optimists like economist Steven Gallagher of Societe Generale, don't think that will happen.
STEPHEN GALLAGHER, CHIEF ECONOMIST, SOCIETE GENERALE: We see the housing situation as one that's -- housing valuation -- as one that is supported by low mortgage rates, that is supported by strong income growth in the economy. So, on a national basis, we're not I would say, very worried about the housing market.
MILLER: He predicts economic growth will be at least 2.5 percent for the year, a moderate pace; 2.5 percent is also the median forecast of 21 economists polled recently by the securities industry and financial markets association. But a small group, including economist Bob Brusca of Fact and Opinion Economics, think growth could roar back in 2007 with surprising vigor.
ROBERT BRUSCA, CHIEF ECONOMIST, FACT AND OPINION ECONOMICS: I think in 2007, the economy is shifting gears and is going to be stronger. I think we're going to see growth move up above 3 percent into the 3 to 3.5 percent range.
MILLER: Experts are also split on the outlook for interest rates next year. Many economists, including Joe Lavorgna of Deutsche Bank, expect the Federal Reserve to cut rates.
JOSEPH LAVORGNA CHIEF US ECONOMIST, DEUTSCHE BANK: We believe the Fed's next move is a rate cut, likely to come at the end of the first quarter and we look for successive rate cuts after that so that in total, we think the funds rate will be cut 100 basis points in 2007.
MILLER: But others predict the economy will prove so resilient that central bankers will have to raise interest rates to keep inflation in check.
BRUSCA: I think that inflation is going to pick up again. I think that energy prices are going to see some renewed strength at that point. And I think the Fed is going to be hiking rates in 2007.
MILLER: Even if the U.S. economy doesn't meet the strict definition of recession, experts say consumers will likely feel the slowdown. Most economists expect the unemployment rate will rise next year, due to layoffs in construction, real estate and manufacturing. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
