Posted on 11/22/2006 1:18:38 AM PST by bruinbirdman
White House blames unexpectedly soft housing market Prediction on inflation shows improvement as energy prices plummet
A slowdown in the United States housing market has driven the White House to lower its forecast for economic growth for this year and next.
"The housing market, as you know. has been hit harder than most of us had expected," Edward Lazear, chairman of the White House Council of Economic Advisers, told reporters during a conference call yesterday.
He predicted the worst of that decline could be over by the first quarter, if it isn't already.
"Whether it's bottomed out now is still up for grabs," he said.
He added that housing weakness has been contained to that sector and is not expected to create major problems for the overall economy.
The White House forecast that real gross domestic product growth this year will be 3.1 per cent.
That's down from an earlier forecast, made in June, of 3.6 per cent.
For 2007, the administration projected 2.9 per cent, down from 3.3 per cent.
This is close to the consensus of a panel of forecasters surveyed by the Blue Chip Economic Indicators newsletter: 3 per cent this year and 2.8 per cent in 2007.
Economists often cite the Blue Chip forecasts as a benchmark.
"The economic forecast clearly reflects the fact that the U.S. economy is moderating to more sustainable growth levels, firmer labour markets and steady inflation rates," said Treasury Secretary Henry Paulson in a joint release from the President's Council of Economic Advisers, the treasury department and the Office of Management and Budget.
The administration's forecast for inflation this year improved in this latest forecast, because energy prices have fallen sharply. The consumer price index, the government's key measure of prices consumers pay, is expected to expand 2.3 per cent in 2006, less than the 3.0 per cent increase predicted earlier.
"Going forward, I think things look pretty good, and we hope to be in good shape on the price front," Lazear said.
In 2007, the consumer price index is expected to advance 2.6 per cent, slightly more than the 2.4 per cent advance projected earlier.
Despite slower growth expectations, the administration projects a stronger job picture, with the unemployment rate to sit at only 4.6 per cent this year and next.
That's lower than the 4.7 per cent and 4.8 per cent unemployment rates earlier projected for this year and next, respectively.
"This is a very tight labour market," Lazear said.
What does that have to do with Michael Richards?
Or economic reports, for that matter?
I wonder why none of these "economic advisers" seem to have never bothered to study any economic history? Bubbles generally are followed by busts. The boom/bust cycle has been a constant during our whole history as a nation. It is obvious that the heady gains in so much of the housing market were not sustainable in the long term unless we decide to also increase the inflation rate. But with the amount of outstanding debt we have, kicking up interest rates would be a very expensive route to go.
I hope that if we must have a correction that it is a very mild one, but I have to admit that I am concerned by the absolute size of the money involved. It's not as big relative to our economy as the great French Banque Royale bust engineered by Mr. Law, and it certainly is not as specious as his Mississippi Company, but the amount of money is significant and I hope that our "economic advisers" will chart a wise course through it.
We use a lot of financial derivatives that have a lot of assumptions built into them, and such products often do not take well to exceptional conditions.
The Fed needs to ease up.
Financial derivatives are by intent, the most risky of all vehicles. They are not even in the category of "investments" but rather pure speculation. Thus, they should not take well to abberations. That is precisely why they exist.
Both booms and busts are subject to the laws of economics. Each occurs for specific reasons which do not include a circular argument. eg a boom does not cause a bust and a bust does not cause a boom.
Three factors drove the recent housing boom
1. Interest rates. Maybe the Fed should have stopped at 15 rate increases rather than go for 17 rate increases (or whatever the numbers were.)
2. No Taxes. When a house is sold at a profit, that profit is taxable .... unless the seller puts that profit into an even more expensive house. Profit on the sale of a house is one of the few areas not taxed. Taxes depress economic activity. Lack of taxes attracts money and growth to that activity. This factor is the only one of the 3 factors that has not changed recently.
3. Supply and Demand. When a baby is born, the economy must wait 25 or 30 years for that person to buy a house. But immigrants (legal and illegal) are typically able to buy a house within 5 or 6 years of arrival. The banks and mortage companies (but not real estate agents, at least in IL) have increased their competition for the immigrant's busines. They have a lower rate of default and foreclosure than citizens of the same economic profile. They are more conscientious about their obligations. They often have a stronger safety-net of extended family to guarantee the mortgage than do citizens.
When the demand from immigrants increases, it drives up the price of the houses they seek, which are often at the lower end of the market. The sellers take their profit and buy a more expensive house. (See #2) That creates an increased demand for the middle-market. Those sellers take their profit and buy upper-middle houses. Those sellers take their profit and buy luxury homes. Trickle up is great and it was working. The rising tide lifted all boats.
But as uncertainty about the future of immigrants increased, the housing demand from them decreased. Every analysis of immigration from a purely economic viewpoint by an economist consistently predicted this event. It was in posts to FreeRepublic by those who analyzed the economics of immigration.
Even the intelligent people who argued for a crackdown on (illegal) immigration conceded that there would be economic pain, that that this economic pain must be accepted because national sovereignty or security or whatever were more important than a happy economy. In short, the anti-immigrant forces lost at the ballot box. But they won a battle in the housing market.
How the MSM SHOULD handle it.....
The Democrats were elected...the economy tanked....
What for? Savers are barely breaking even with taxes and inflation. I am in no mood to rescue people that didn't lock in with fixed rates mortgages..
What for? To give the economy a boost. It's slowing down. Typically, when the fed sits on its can while the economy slows down, we end up in a recession.
I don't care. People have to get use to living with normal interest rates. If the fed drops it too much, foreigners will quit buying our bonds and the dollar will get even weaker. Then the price of oil goes up, etc...
They don't need to drop it too much. They just need to drop it until we get up over 3% growth. That is not an excessive growth rate.
Oh come on.
A tweak here and a tweak there doesn't bother me much. A big tweak down does. If they they take it too low, then none of the excesses ever get shaken out..
WOMEN AND MINORITIES HIT HARDEST.
I agree with that. The truth is that they may not need to reduce the fed funds rate at all. They could just add some liquidity to the market thru open market transactions.
I do think though that the current slowdown is the result of tightening by the fed. This is the point at which they usually overdo it. They have a habit of waiting until the bad numbers start to show up in the economic statistics before easing up. By that time, it's too late. They need to better anticipate what's coming down the pike.
Frankly, I think the lower forecast is because consumers are depressed about the Democrat party seizing control of Congress.
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