According to the American Bankers Association Economic Advisory Committee (EAC), a further contraction in homebuilding will limit overall economic growth in 2007, but the U.S. economy will remain relatively strong with contained inflation, low unemployment and strong corporate balance sheets. The EAC meets in Washington twice annually to provide perspectives on the national and local economies to top policymakers. The group met with governors of the Federal Reserve Board and a member of the President's Council of Economic Advisors.
"Residential construction will continue to weaken in 2007, but its drag on the economy will lessen as the year goes on," said Scott J. Brown, EAC chair and chief economist of St. Petersburg, Fla.-based Raymond James & Associates Inc. He added that other sectors of the economy should continue to exhibit moderate strength.
The EAC's consensus forecast is that the national economy will grow at an annual rate of 2.7 percent in 2007. Lower oil prices and below-potential economic growth will help underlying inflation settle under 2.5 percent.
"With the unemployment rate edging up and inflation expectations contained, the committee expects no change in Fed policy over the next several months," said Brown. He noted, however, that committee members were divided over what action the Fed might take in the second half of the year.
According to the committee's forecast, national home sales will bottom out by the middle of 2007, with residential construction activity continuing to decline into the second half of the year. This combination will help bring balance back into the housing market before year's end.
"The housing sector will remain a drag on the overall economy, but secondary effects should remain limited," said Brown. "We don't expect the housing market weakness to put a serious dent in consumer spending.
The business sector is expected to have a good year, with business-fixed investment rising by 5.9 percent, according to the forecast. Strong global growth will be another source of support, with net exports adding to GDP growth for the first time since 1995. The committee noted a number of upside and downside risks to the outlook: Energy prices remain a wild card; if the recent drop in oil prices is sustained, then the outlook for consumer spending will brighten. In addition, committee members differed on when the housing market would stabilize and some saw risks of a more substantial correction.
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