U.S. Housing - Set for a soft landing?

I sure hope these IMF characters are right….


WASHINGTON (AFP) – The IMF said the US economy is on course for a "soft landing" but that an overvalued property market, sky-high energy prices and rising inflation could all bode ill.

In a review of the world's biggest economy, the International Monetary Fund said the United States continues to be "a key engine of global growth" despite higher Federal Reserve interest rates and oil prices.

The IMF foresaw US economic growth in 2006 matching last year's annual figure of 3.5 percent, before slipping to 3.1 percent in 2007.

"Looking forward, directors saw good prospects for a soft landing of the economy, with growth likely to ease to a more sustainable rate and inflation to remain contained," the IMF board said.

"However, most directors cautioned that risks to activity are on the downside, reflecting a cooling housing market, higher energy prices, and a negative household saving rate," the report said.

It warned in particular that US property prices, whose stunning rally of recent years has stoked consumer spending, now look "overvalued."

"At the same time, these directors observed that the recent pick-up in core inflation and expectations, coupled with a further drop in the unemployment rate, suggests a risk of a build-up in price pressures."

Earlier Friday, the US government reported that gross domestic product (GDP) growth slowed to 2.5 percent in the second quarter compared with a robust pace of 5.6 percent in the three months before.

But the report also showed inflationary pressure building despite the slower growth, accentuating a policy dilemma for the Fed after 17 consecutive hikes to US interest rates.

The IMF said the Fed "will need to steer an especially delicate course that limits downside risks to activity while ensuring that inflation expectations remain anchored".

It said the US central bank's communications strategy had been "highly effective" but could still benefit from "a more explicit statement of its inflation objective".

Fed chairman Ben Bernanke has long advocated an explicit inflation target to govern the bank's monetary policy, although some IMF directors were cited as believing that this would add "little" to its credibility.

The IMF's overall appraisal chimed with Bernanke's own belief, spelt out to Congress last week, that the US economy is entering a period of "transition" to a more moderate pace that should help limit inflation.

However, Wall Street pundits remain divided over whether the Fed will call off its long-running campaign of rate hikes when it next meets on August 8.

Looking further ahead, the IMF reiterated calls for the US government to get its fiscal house in order to cope with the mounting costs of healthcare and pensions as "baby boomers" start to retire.

It noted that President George W. Bush's administration, helped by buoyant tax revenues, is on track to halve the federal deficit before its target of 2009.

The latest White House projections foresee a budget deficit of about 2.3 percent of GDP for the current fiscal year, compared with 3.2 percent under the last forecast.

Most IMF directors therefore "suggested that the time is opportune to establish a more ambitious medium-term fiscal anchor."

"In particular, they noted that balancing the budget, excluding theSocial Security surplus, within the next five years would set the federal debt ratio on a firm downward path," the review said.

"Although controlling outlays should remain central to deficit reduction, most directors suggested that revenue measures should not be ruled out," it added.

That could prove anathema to a White House that has built its economic policy on the bedrock of multi-billion-dollar tax cuts.

by Jitendra Joshi

The Daily Reckoning