U.S. growth strong but housing market at risk-UCLA
Tue Jun 22, 2004 04:00 AM ET
SAN FRANCISCO, June 22 (Reuters) - The U.S. economy will grow 4.3 percent this year as business spending improves and payrolls expand, but a recession could be around the corner if rising interest rates hammer the housing market, according to a widely watched forecast.
The latest outlook released on Tuesday by the UCLA Anderson Forecast for gross domestic product growth this year was slightly better than its projected 4.1 percent in March, but the strong pace masks concerns about factors driving growth, said economist Edward Leamer.
While many analysts expect rising productivity to continue fueling strong growth, the director of the UCLA Anderson Forecast said the economy may be feeling the "final ripple effect" of the Internet boom.
Once it passes, growth will return to a historical average of 3.1 percent per quarter, said Leamer, one of the first economists to flag the most recent recession. For 2005, Leamer expects 3.2 percent growth, followed by 3.3 percent in 2006.
"I think it's a return to normal and that the productivity point is still open," Leamer said.
Additionally, GDP growth will return to a 3-percent trend as stimulus from tax cuts and low interest rates, which created a "credit-driven spurt" in growth, fades, Leamer said.
The widely anticipated upturn in interest rates may unravel the housing market, which could trigger a recession perhaps next year or in 2006, Leamer said.
Low interest rates have fueled a housing boom, robbing the economy of future home sales and guaranteeing weakness in the housing market in coming years, according to Leamer.
The market will further weaken as rates rise and may even collapse, Leamer said.
Battered by rising rates, the housing market fell in advance of eight of the 10 economic downturns since World War Two, Leamer said.
"When we see the next downturn in this country, it's highly likely it will be on the consumer side, particularly with homes," Leamer said. "The question is will that weakness be strong enough to cause an official recession?"
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