This morning, I would like to give you a rather brief outline on the state of the American economy for 2007.
According to current forecasts the predicted growth would be between 2.3% and 2.5%, but the American economy is sending out mixed signals. On the one hand, there is a very healthy corporate sector, but on the other hand, the real estate market is in a free fall. The great concern now is whether or not the recession in that market will affect consumer spending.
In my opinion, there is every likelihood that consumer spending will be seriously affected, a trend that has not been properly accounted for in economic forecasts.
I have with me a series of figures representing various US real estate market indicators; they are from an American publication, and I have been granted permission to use them. What these figures show is that, over the past five years, there has been an unprecedented increase in wealth. What is important to note, however, is that American households have used this wealth to spend beyond their means. People have been spending more than they are earning, there is a negative household savings rate, while the rate of spending and consumption is enormous. It is estimated that as much as $300 billion has been spent by consumers against the rising value of their properties.
A falling real estate market will put an end to this source of consumer funding and will no doubt force American household to return to saving. The effects of a slowdown in the real estate market are two-fold. There is the investment side, with residential housing construction in a normal year representing about 4.5% of the GDP in the United States. The rate for the past two years was 6%, meaning that a return to traditional construction rates would cut economic growth by 1.5%. That is a direct effect.
Then we have the indirect effect on consumption. If sustained consumption represents $300 billion, then 2.5% of the US GDP could be affected if people begin to spend less.
American forecasters are currently watching the trend in retail sales. They want to know if household spending is cooling off. The October sales figures were rather disappointing, but current opinion is divided. There is a great deal of uncertainty as to the US economic performance for 2007. In my opinion, a forecast of 2.5% is rather optimistic. Americans have been overspending for years now, and any slowdown in the rate of consumption will have a greater effect on GDP growth than current forecasts seem to predict. Therefore, a 2% forecasted increase for 2007 would appear to be closer to the upper range than what we might reasonably expect in terms of growth for that year. That being the case, there is a great deal of risk in the American economy at this time. And there is another risk — I don't cover it in this document but the Bank of Canada is well aware of it — namely, the effect on the US current account.
That is all I have to say. I will be happy to answer any questions you may have. I believe that I have stated the main point. Thank you.