2007 Economic Outlook: The Housing Market, Labor Numbers, Inflation and the Dollar Rank High on Economists' List for Unlocking the Direction of Next Year's Economy. but Where Will Interest Rates End Up? and Just How Good or Bad of an Economic Performance Are We in for? Traders and Analysts Mull over the Issues and Provide Some Predictions
Bauch, Carla M., Modern Trader
While interest rate forecasts lately seem to change with the wind, there is some consensus coming from economists on this year's economic outlook. The housing slump seems destined to be the main negative factor for the economy, the Fed will focus very closely on labor and inflation numbers, and many even agree on the economy's wildcard--the dollar. If foreign investors diversify and sell greenbacks, most analysts agree the U.S. economy definitely will take a hit.
"The wildcard could be the sudden loss of international confidence in the dollar," says Dr. Dan Seiver, economist with Wizetrade ThinkTank and visiting professor of economics at San Diego State University's finance department, explaining that if this does occur the impact would be very negative on the economy and the U.S. stock market. What would it take for this to happen? If China and Japan begin to diversify, Seiver says this would lead to weakness in the dollar.
Cary Leahey, senior economist with Decision Economics Inc., explains, "China is holding $1 trillion in U.S. assets in reserve, if they dump these someone else would buy them, but they would buy them at a more favorable price, providing a potential ugly drop in the dollar." According to Seiver, "We are stuck in a crazy dance with China. And neither of us can stop dancing."
But while the dollar right now appears to be an unknown for 2007's economy, the housing market's effect this year is quite clear to most economists and analysts: the housing market will be a significant drag on the economy.
James O'Sullivan, U.S. economist with UBS Securities LLC, explained late in 2006, "[The housing market] will drag down growth for the next couple of quarters. There will be a decline over the next year." O'Sullivan is referring to housing prices. He says as a result consumers will have less wealth, less equity, to tap into, which in the end may result in less consumer spending.
Seiver, like most economists, agrees with O'Sullivan, saying the housing sector will hold back this year's economy. He expects the housing market to stay weak for another year if not longer. Leahey says the earliest he sees the housing market improving would be the third quarter. "It is definitely the 800-pound gorilla on the economy's back."
The data supports housing market bears. The National Association of Realtors' reported on Nov. 28 that the price of existing homes sold in October fell for the third straight month and posted the biggest drop on record. The association said the median price of a home sold in October was $221,000, down 3.5% from October 2005. Data in November also showed a drop to a six-year low in new building starts.
In addition, major builders have seen sales and earnings fall. Barry Ritholtz, chief market strategist for Ritholtz Research & Analytics, says the real estate market is still free falling and the sector is not close to the bottom. "Everything that was real estate affiliated is now problematic, causing a significant impact on the overall economy," Ritholtz says. He adds real estate is in a recession and the question is whether it will spread to other sectors.
LABOR TAKES THE STAGE
Despite a significantly cooler housing market, which has been accompanied with job losses in this sector, the employment climate is strong. The U.S. unemployment rate dropped to a five-year low of 4.4% in October as employers added 92,000 new jobs. This marked the third month in a row that the jobless rate declined. However, some economists and analysts are not particularly optimistic going forward in regards to labor numbers. "While the United States has not seen a clear, consistent weakening in labor numbers, it is only a matter of time," O'Sullivan says. He points out unemployment rates will be one of the keys to the Fed's decision in lowering interest rates. Jim Goulding, fixed income trading coach and analyst at Goldenberg Heymeyer & Co. …