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Wednesday, March 08, 2006

Slowing housing won't sink spending: Poole

by Calculated Risk on 3/08/2006 02:59:00 PM

From Reuters: Slowing housing won't sink spending: Poole

The U.S. housing sector may already be cooling but it should maintain its lofty level and not undermine the economic expansion, St. Louis Federal Reserve Bank President William Poole said on Wednesday.

"My hunch ... is that housing activity will stabilize and remain at a high level this year," Poole told the St. Louis Regional Chamber and Growth Association over breakfast.
Those are the big questions: Will housing activity "stabilize" or keep falling? And what will be the impact on jobs and the US economy?
Poole, who is not a voting member of the FOMC this year, said rising inventories of unsold U.S. houses signaled a slowdown may already be underway.

Some economists have forecast a downturn in the housing sector will sap consumer spending, which has been driving U.S. growth since a shallow recession in 2001.

They argue that homeowners have extracted equity from now more valuable homes to support spending despite, weak income growth in recent years. But Poole dismissed this concern.

"The marginal contribution to the pace of consumer spending stemming from the wealth effect -- that is, from households extracting a portion of their home equity to spend on goods and services -- is not likely to be a significant concern."

"The reason is that other economy-wide developments, especially income and employment growth, typically exert a much greater influence on the consumer's pocketbook and spending habits than does the state of the housing industry,' he said.
I disagree with Poole's comments. I think the substantial mortgage equity withdrawal (MEW) in recent years contributed significantly to GDP growth, and declining MEW will be a significant drag for the next few years.