Tuesday, January 03, 2006

The Economy Depends on Housing

The Wall Street Journal has an article today that describes the economic outlook for 2006. The main takeaway from the article is that businesses will spend heavily in the year ahead and that consumers will be forced to reign in spending as the housing market falters.

I think that strength in the business sector is a positive for housing bears. If business spending grows at a healthy pace and keeps the broader economy chugging along, then I think the Fed. will feel empowered to continue to try to reduce the negative effect the housing bubble is having on the economy without the fear of plunging the economy into a recession.

“Strong spending by businesses should power the nation's economy to a fifth straight year of expansion in 2006, according to a survey of economists' forecasts, but a softening housing market is likely to slow the overall pace of growth.

For the past five years, real-estate wealth has supported the economy by providing consumers with cash to buy everything from designer kitchens to luxury vacations to new or second homes. Some economists believe that the boom has been responsible for creating more than one million American jobs since 2000.

But as home sales start to slow and the inventory of unsold homes climbs, many economists believe that home prices will rise more gradually, or even decline, delivering a jolt that causes consumers to rein in spending. That, in turn, may cause economic growth to slow.”

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