soft landing v housing going forward

All the looks of a soft landing
Housing's collapsed, but consumers, businesses keep doing their thing
PrintE-mailDisable live quotesRSSDigg itDel.icio.usBy Rex Nutting, MarketWatch
Last Update: 11:35 AM ET Oct 27, 2006


WASHINGTON (MarketWatch) -- This is what an economic soft landing looks and feels like. This is what the Federal Reserve has been working for.
The economy downshifted to its slowest growth in three years during the third quarter, expanding at a tepid 1.6% annual rate, the Commerce Department said. It's about half the growth rate that most economists think is sustainable. See full story.
But it's still moving forward.
Consumer price inflation has now grown at an uncomfortable 2.4% over the past year, the fastest pace since 1995 -- which, not so coincidentally, was the last time the Fed managed to slow the economy without crashing it.
Fed policymakers figure a few more quarters of moderate growth should reduce inflationary pressures just enough to forestall further increases in interest rates. Job growth would slow but not collapse. Consumers and businesses would keep doing what they do: Spending, selling and producing.
A few more quarters of moderate growth was just what the Fed predicted after its meeting on Wednesday -- in other words, a soft landing. See full story.
For consumers, it was pretty much business as usual in the third quarter. Consumption grew 3.1%, thanks to more giveaways by the automakers. Real disposable incomes grew even faster, up 3.7%. The savings rate improved marginally, to a negative 0.5%. But wage growth slowed to 2.2%.
As for business owners, it was a good time to invest. Investments in structures continued to grow at double-digit rates, while investments in new equipment and software grew again after a surprising contraction in the second quarter. Inventories remained lean, an important insurance policy against recession.
But there's one big hole in the economy: Home building.
After years of boom, it's payback time. The recession in the housing sector worsened. Residential investments have been negative for four straight quarters, plunging at a 17.4% annual rate, the worst performance since 1991 and the largest drag on growth since 1981. Both 1981 and 1991 were recession years for the economy.
The secondary impact of the housing collapse isn't yet apparent in the data, either on the growth side or the employment side. Some have theorized that consumer spending will slow in the coming quarters as homeowners reassess the wealth they have in their dwellings.
Conversely, motor vehicles were one source of surprising strength in the third quarter.
Although Detroit has been losing billions, the production of motor vehicles increased 26%, and contributed 0.7 of a percentage point to growth, almost half of the GDP total. Clearly, that won't continue in the quarters to come, as the automakers retrench to smaller and leaner operations.
On the upside, however, lower energy costs should free up money for both consumers and businesses to spend on other things, perhaps enough to offset the drag stemming from the housing recession.
Rex Nutting is Washington bureau chief of MarketWatch