The Commerce Department’s report Friday showed how the slumping residential real estate market is affecting the national economy. The combination of slower sales and tighter lending led to the economy rising only 1.3 percent in the first quarter of 2007. Businesses are pulling back in the face of the slowdown as they do not want to be overextended if the economy as a whole slows down.
“The economy went through a very soggy period,’’ said Lynn Reaser, chief economist at Bank of America’s Investment Strategies Group. “The biggest risk to the economy is if the housing market doesn’t stabilize. That could force consumers and businesses to cut back sharply in spending. Those risks seem to be limited at this juncture,’’ she said.
Even though the economy slowed in the first quarter, inflation picked up. That could complicate the Fed’s work of keeping the economy and inflation on an even keel. “This is a knife’s edge scenario,’’ observed John Silvia, chief economist at Wachovia Economics Group.
An inflation gauge tied to the GDP report and closely watched by the Fed showed that core prices — excluding food and energy — rose at a rate of 2.2 percent in the first quarter, up from 1.8 percent in the fourth quarter. via Pantagraph.com
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Consumers have propped up the economy, but that is coming to halt here in my area. When home owners have spent the equity created during the runup and new home owners bought without down payments, there is no more equity to spend. The national savings rate went to -1% in 2006. Where is all this money coming from?
The biggest reason the real estate slump hasn't hit employment harder is that the first wave of layoffs hit illegal workers from Central America–primarily Mexico–first. They were never on the rolls, and they don't file for unemployment when they move on.
This can be seen in the sharp reduction in "remittances"–money sent home by illegal workers. Annual remittances to Latin America total nearly $70 billion. So this first wave of unemployment, while nearly invisible here, threatens to destabilize the economies of those countries early in the process.
I am sure the worst is yet to come! The point made above about the equity spend is very valid, also when consumers smell a down turn they stop spending and so the cycle continues. In Australia there is a very similar situation although we run behind the US things that happen in the US always seem to ripple outwards. People should be smart and spot the warning signs.