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What Now for the U.S. Economy?


Economic indicators, especially in key sectors such as housing, point to a slowdown in the U.S. economy.

The economies of nations are never static. They influence and respond to changing conditions such as industrial production and retail sales performance, as well as other factors including the level of employment and interest rates. National economies also go through cycles of expansion and slowdowns. The U.S. economy, according to many analysts, is now in such a period of transition.

The U.S. Gross Domestic Product, or G.D.P., a measure of goods and services produced, grew at a 5.6 percent annual rate in the first quarter of this year. But second quarter G.D.P. growth was much less at 2.9 percent. Many analysts expect an even poorer showing for the rest of the year. By comparison, overall G.D.P. growth was 3.5 percent last year.

Business Cycles

Steve Whiting is an economist for Citibank in New York. He says there are reasons why national economies have up-and-down cycles.

"Part of the cyclical process is forecasting the future and acting upon it - - planning consumer upturns and planning consumer downturns. And ultimately that planning process, in inventories, in capital investment and other business activity goes too far. We build too much product for [i.e., in expectation of] demand or we build too little. And it requires a reaction to get back on trend. And that creates cyclical activity," says Whiting.

One of the factors that affects the economy's momentum is consumer household spending, which many analysts say contributes as much as 70 percent to America's overall G.D.P.

Traditionally, the level of consumer spending reflects disposable income, the cash remaining after people pay their monthly expenses and taxes. But David Yun, an economist at the National Association of Realtors in Washington, says that in recent years U.S. consumer spending has also been driven by something else - - the value of people's homes.

Housing Sector

"The housing market directly contributes about 15-to-20 percent of G.D.P. More importantly, housing has supported the economy indirectly. Home prices have risen dramatically in the past few years. Because of this gain, homeowner felt very comfortable spending," says Yun.

Many people cashed in on those price gains by taking out loans against the value of their homes. They then spent the money on everything from new cars to household furnishings and vacations. But by the middle of last year, the real estate market was feeling the effects of rising mortgage interest rates and the start of a slowdown in the rise in home values. That made it much less attractive for homeowners to secure loans that had been a major source of cash for consumer spending.

Tim McGee, Chief Economist at New York Trust Company, says this change in the housing sector is reverberating throughout the U.S. and beyond. "The big question is: 'How much spillover effect is this housing slowdown [going to produce] and the [resultant] pressure on consumer discretionary income?' And [consequently]: 'How much impact is that going to have on business' willingness to spend and invest?' And number two: '[How much of an impact will this have] on the global economy?'"

Another set of brakes on the U.S. economy was the sudden jump in energy prices last September. Higher demand and decreased oil and gas production in the wake of Hurricane Katrina and other storms sent prices soaring. Phillip Neuhart at Wachovia Securities in Charlotte, North Carolina says energy costs have had a broad impact.

"If a person is spending more on a tank of gas [i.e., gasoline], that affects disposable income, which can [then] affect retail sales. But it [i.e., higher energy costs] also affects businesses that transport their goods. As energy costs increase, a lot of businesses have had trouble passing [those] higher costs on to their customers. So it's not a good thing on the economy," says Neuhart.

Many analysts say the U.S. Commerce Department's retail sales figures bear this out. Only a 0.2 of a percent gain was posted for August after a modest 1.4 percent increase in July.

The U.S. Economic Outlook

With the housing sector slowdown, high energy costs and concerns over higher interest rates, many economists predict only modest U.S. economic growth in the immediate future. Ken Goldstein with the New York-based business group, The Conference Board, is one of them.

"The U.S. economy is not that bad. The problem is that it's going to take a while before it gets any better. The slower pace of the economy - - down into 2 or 2.5 percent [G.D.P.] growth is likely to stay through the second half of this year and possibly through the second half of 2007."

The National Association of Business Economists predicts that U.S. Gross Domestic Product will rise 2.6 percent through the rest of this year and 2.8 percent for all of next year. The last time G.D.P. rose so little was in 2003, which posted a 2.7 percent gain.

Tim McGee at the U.S. Trust Company is more pessimistic. He forecasts only a two percent gain for the remainder of this year. He also says that changing U.S. economic conditions are affecting the world economy.

"The hope had been that this slowdown in the [U.S.] consumer sector would simply rebalance global growth and [achieve] a more balanced trade situation. [However,] we're starting to see some early indications that growth may be peaking in the rest of the world," says McGee.

The International Monetary Fund says that because of high global energy costs and the slowdown in the U.S. economy, it expects U.S. G.D.P. to rise two-point-nine percent next year and the world's G.D.P. to gain four-point-nine percent. But if inflation rises and central banks such as the U.S. Federal Reserve react by tightening the money supply, those predictions could be revised lower. And because national economies are increasingly intermeshed, the global economy could be affected.

This story was first broadcast on the English news program,VOA News Now. For other Focus reports click here.

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