- The Washington Times - Friday, October 27, 2006

The steep downturn in the housing market took its toll on the economy in the summer quarter, holding growth down to a 1.6 percent pace, the slowest in more than three years, the Commerce Department reported yesterday.

Housing construction fell by 17.4 percent after declining by 11 percent in the spring quarter, the biggest drops since 1991, which was the last time the housing market went into such a sharp downturn. The slump in housing largely offset greater strength in business investment in office buildings, plants and computers, as well as an uptick in consumer spending during the third quarter.

“We are feeling the effects of the housing bubble bursting,” said Joel Naroff, president of Naroff Economic Advisors, a Pennsylvania forecasting company, expressing hope that housing will rebound quickly. “While the ill wind is not pleasant, it is not likely to be long lasting,” he said. “Businesses and households did their part to keep the economy going.”

Consumer spending expanded by 3.1 percent while commercial construction jumped by 14 percent and equipment spending rose by 6.4 percent — all strong showings that muted the collapse in housing.

“Consumers and business investment continued to stave off the recession that the housing adjustment and the tide of imports could easily cause,” said Peter Morici, business professor at the University of Maryland.

He calculated that housing subtracted 1.1 percentage points from economic growth while burgeoning imports — primarily purchases of fuel and goods from China — deducted another 1.3 points. The trade deficit during the quarter remained at a record 6.1 percent of economic output.

Still, consumers have survived the downdraft in housing pretty well so far, because they still have substantial equity in their homes built up after five years of double-digit gains in many areas, Mr. Morici said. He expects growth to pick up in the months ahead.

Consumers have been bolstered by a record fast drop in oil and gasoline prices since Labor Day, and a move by the Dow Jones Industrial Average to surpass its previous record high set in 2000. A measure of consumer sentiment published by the University of Michigan yesterday showed an uptick in response to both developments, which may stimulate stronger consumer spending in the final quarter of the year.

Some economists are not so sure the economy will bounce back quickly from the housing debacle, however.

Jason Schenker, economist at Wachovia Securities, said the depth of housing’s troubles caught many analysts by surprise and is forcing Wachovia and others to revise their forecasts for economic growth.

“We still expect a bumpy-to-soft landing, but not a hard landing” for the economy, he said. “We won’t get a recession.”

Christian E. Weller, senior economist at the Center for American Progress, a liberal think tank, said the economy cannot easily shake off the effects of the housing slump because of the critical role housing played in boosting economic growth between 2000 and 2005.

“The underlying story is that since the sharp end to the housing boom, there has not yet been a replacement to drive the economy,” he said. “Other sectors of the economy either failed to grow fast enough to compensate for these declines, or presented an additional strain on the economy.”

Consumers had to dip further into their savings and go deeper into debt to keep contributing to economic growth during the quarter, and federal spending on defense and other areas already is high and cannot be expected to fill in gap, Mr. Weller said.

“The important question is whether the continued expansion in business investment will be enough to create new jobs with higher wages and spur income-led consumption growth,” he said. “For the economy to regain a healthier footing and end its dependence on debt, income needs to grow faster again.”

House Speaker J. Dennis Hastert, Illinois Republican, sought to put the best face on the news, noting that the economy expanded forthe 20th straight quarter and remains on solid footing.

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