US economy entering 2006 firm, but growth may slow

Font Size

Print

Feedback

Email

Discuss

• Discount UK Shopping

New York, Dec 19: The US economy is set to enter 2006 on a firm footing even as rising interest rates temper the housing market, but if spending shrinks it could pose the biggest threat to growth, a Reuters poll showed.

The Federal Reserve appears to have won the war against inflation, especially now that energy prices have retreated from the highs seen after Hurricane Katrina hit US refining capacity in late August and the economy is chugging along. But after 13 successive interest rate rises, the cost of the Fed’s tight rein on monetary policy may be more modest growth next year and the bank has hinted it may not have much more scope to raise rates. Rates have risen to 4.25% from 1% just 18 months ago, and tighter monetary conditions are starting to bite into the sizzling housing market and into consumers’ wallets, according to a poll of 44 economists. “A housing downturn, in part triggered by the Fed’s policy actions, will become more pronounced as the year progresses, placing consumer spending, credit-quality, and job creation at some risk,” said Scott Anderson, Wells Fargo senior economist. Consumer confidence took a huge hit after the storms that battered the US Gulf Coast at the end of the summer, and sentiment indexes fell to their lowest in over a decade. But this did not lead to the slowdown in consumer spending — which accounts for roughly two-thirds of overall US economic activity — that many had feared, at least in 2005.

However, 2006 may be a different story, particularly if the Fed keeps raising rates. The poll showed analysts are looking for a strong start to the year, with growth averaging 3.6% in the first quarter as post-Katrina reconstruction boosts productivity. But gross domestic product growth will tail off to 3.1% in the third quarter next year, remaining at that pace in the fourth quarter also. GDP growth in the third quarter this year came in at 4.3%. For 2006 as a whole, GDP is forecast to come in at 3.4%, compared with 3.6% in 2005.

“The primary driver of this slowing is consumer spending. Spending will be hurt by continued elevated energy prices and a slowing in housing,” said Merrill Lynch economist David Rosenberg.