Sunday, October 29, 2006

U.S. housing woes a ‘buzz saw'

BARRIE MCKENNA

From Saturday's Globe and Mail

WASHINGTON — There is fresh evidence that the severe housing slump is weighing heavily on the U.S. economy, and by association, on Canada's fortunes, too.

The world's largest economy expanded at an annual rate of 1.6 per cent between July and September — a full percentage-point slower than in the second quarter and well shy of forecasts — according to a report released yesterday by the U.S. Commerce Department.

The main culprit was the steepest decline in spending on U.S. home construction in 15 years, along with a growing trade gap.

BMO Nesbitt Burns economists likened the impact of the housing woes to taking a “buzz saw” to the U.S. economy.

“For Canada, this is not good news,” concluded BMO Nesbitt Burns chief economist Sherry Cooper. “The slowdown in the U.S. inevitably weakens the Canadian economy.”

What's happening in the United States is already spilling over into Canada, most immediately in the building materials market. Producers of everything from lumber and gypsum to copper wiring are suffering from dropping demand south of the border, and falling prices.

Ontario's export-oriented economy is feeling the twin effects of the strong Canadian dollar and the struggles of the Big Three U.S. auto makers, which are shutting plants to cope with falling demand.

The most immediate threat is housing. It's not yet clear how deep or how long the housing slump will be. Some economists are convinced the worst may already be over, and the United States is headed for what looks like a soft landing.

“The drag from residential construction likely peaked in the third quarter,” said economist Zoltan Pzsar of Economy.com. “From here on forward we will see smaller drags.”

For now, though, prices for both new and existing homes are falling sharply after a long boom. Priced out of the market or spooked by the slowdown, buyers are staying away in droves, particularly in the U.S. Northeast.

The collapse hits home sellers first, along with heavily mortgaged homeowners who may have to put up additional collateral to cover their falling equity. Longer term, the worry is that many homeowners will feel poorer as falling home values eat into their household wealth.

But it's a tale of two economies in the United States, and outside of housing and the auto sector, life is still pretty good. Corporate profits are surprisingly healthy, pushing the stock market to record highs on a near-daily basis and cheering investors. Commercial construction also remains very active. And thanks to falling gasoline prices and still-rising real personal incomes, Americans are continuing to spend, at least for now, and price pressure, outside of housing, is up, not down.

Indeed, if it weren't for the resilience of consumers, the U.S. might already be in recession.

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

Consumer spending actually grew faster in the third quarter than in the second quarter (3.1 per cent versus 2.6 per cent). And even though Americans aren't buying as many cars and houses as they once were, their purchases of other durable goods — TVs, furniture and the like — was up a surprising 8.4 per cent in the quarter.

That, at least, partly explains why U.S. imports continue to grow faster than exports (7.8 per cent versus 6.5 per cent). Many durable goods are made in China and elsewhere.

Mr. Morici pointed out that most other sectors of the U.S. economy should provide a counterweight to what's happening in housing. He predicted that falling oil prices, combined with strength in commercial construction, business spending on items such as software and corporate profits, should keep the stock market rally alive for a while yet.

“Homes will no longer be viewed as a good speculative investment and individuals will put more money into equities,” he said.

No comments: