Milestones : The Teflon Economy Might Get Stickier In 2006 | Global Finance

The US economy is dependent on fortunes of the housing market

The US economy has grown at nearly a 4% annual rate for the past two-and-a-half years, shrugging off a widening trade deficit and rising oil prices. Concerns are growing, though, that the expansion could moderate in 2006, particularly if the housing market cools, according to economists at major US banks. Rising energy costs are taking a heavy toll on disposable household income and could finally begin to cut into consumer spending this year, slowing the expansion, economists predict. Business investment, exports and government spending may take up some of the slack, but US growth in gross domestic product is expected to slow considerably in the second half of this year.

The US trade deficit widened to a record $68.9 billion in October 2005 according to the US Commerce Department’s December report, setting a new high for the second month in a row. The individual US deficits with China, Europe, Mexico, Canada and the Organization of Petroleum Exporting Countries all reached new highs. The report, which was released in December, pushed down the dollar, which already was getting skittish at the prospect of coming to the end of a long string of monthly Federal Reserve interest rate increases.

But do record trade deficits really matter, or are they merely a reflection of a strong economy? US net portfolio investment from abroad reached a record $106.8 billion in October, enabling the US to easily fund its record current account deficit with capital flowing into the country from foreign investors, including central banks and oil exporters.

Most economists say the dollar, which showed surprising strength in 2005, will probably fall again in 2006, as the US rate advantage with Europe and much of the rest of the world reaches a peak. A weaker dollar could boost exports and help keep the US economy rolling along, as long as the wheels don’t come off.

Gordon Platt