Signs That Housing Slump is Affecting Economy

For some time, we have argued that the subprime meltdown in and of itself would not lead to a recession, but would put a crimp in growth (the estimate we find most credible is a 1% reduction in GDP growth for the year starting last September). In addition, we saw the subprime crisis as the tip of a much larger housing iceberg. A deflation of the housing bubble would have a more pronounced impact upon the economy.

The weakening of the housing market is dampening consumer and business activity, according to this story from Seeking Alpha:

The National Association for Business Economics [NABE] quarterly survey of business conditions, released Monday, says corporate profits and demand for goods is shrinking, hiring is slowing, and an increase in mortgage defaults may impact businesses over the coming six months. 33% of executives were more pessimistic about first-half economic growth, while only 13% were more optimistic. Only 1/4 of the 107 businesses surveyed said capital spending was rising, the lowest level in over three years; cutback areas included tech hardware and structures. Profit margins grew for the 15th straight quarter, but growth was focused in the goods and services sectors. 51% of those surveyed reported higher material costs, vs. 30% in January. Respondents reported an abundance of unskilled labor, but 35% reported a shortage of skilled labor. The percentage of companies adding new workers hit a three-year low, and companies planning to add new employees also dropped. Global Insight economist Sara Johnson: “The survey indicates job growth will slow, which in turn will affect household income growth and consumer spending… we had expected more vigorous capital spending, but that simply isn’t happening.” Ken Simonson, Chief Economist, Associated General Contractors of America: “Nearly every indicator… showed slower momentum in the first quarter than previously, with very cautious expectations for the near future.”

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