Home-price dip casts pall on economy

Question of the Day

Should Congress make English the official language of the U.S.?

View results

Richard Berner, chief U.S. economist at Morgan Stanley, expects consumers to continue to spend more freely, particularly as they will be bolstered next year by the extension of President Bush’s tax cuts, extended unemployment benefits, and a powerful new $114 billion cut in Social Security payroll taxes that will benefit people with more modest incomes.

“Despite stubbornly high levels of unemployment and the still ongoing household deleveraging process, personal consumption has essentially returned to growing at pre-recession rates,” and will continue to “play an essential role in driving the unfolding recovery,” he said.

Mr. Berner views the renewed decline in housing prices as a potent threat that could disrupt the consumer revival and economic recovery, however. Morgan Stanley and IHS both expect an additional 10 percent drop in home prices before they turn up again.

“Housing imbalances remain the most significant downside risk,” Mr. Berner said. “A decline in home prices larger than the 10 percent we expect would disrupt further the supply of credit, menace consumer balance sheets, and thus threaten consumer spending.”

Bernard Baumohl, chief economist at the Economic Outlook Group, is optimistic that consumers will overcome their debt and housing troubles.

“The economy is ending the year on a very strong note, and I believe this momentum will carry through well into 2011,” he said.

“Consumer spending is expected to become a major contributor to growth next year,” he said. Despite what people say in response to consumer confidence surveys, the strong uptick in spending recently is betraying increasing confidence about the economic future, he said.

“Americans have become so confident about the economy and their finances, they are setting aside fewer savings,” in the most telling sign of the brightening outlook, he said. The personal savings rate has fallen from a high of 8.2 percent in May 2009 to 5.3 percent last month.

© Copyright 2014 The Washington Times, LLC. Click here for reprint permission.

blog comments powered by Disqus
TWT Video Picks