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Blog by Kasha Riddle | September 13th, 2006

A lot of discussion on the US housing market and what impact will a decreasing Real Estate sector in the US have on the overall economy and consumer spending in the US.  The forecast for Real GDP growth is only 1.0% for the xml:namespace prefix =" st1" ns =" "urn:schemas-microsoft-com:office:smarttags"" />US in Q2 2007 versus an actual 2.9% growth rate for Q2 in 2006.  Home Equity Extraction which peaked at $825 Billion in March 2006 is forecasted to fall to about $100 Billion in 2007.  The Fed estimates that $250 Billion of the $825 Billion went directly to consumption. Americans will have to get used to an extended period of stagnation in the US real estate sector.xml:namespace prefix =" o" ns =" "urn:schemas-microsoft-com:office:office"" />

This may seem dismal, but fortunately for the US economy labour income is back on the rise and should offset some of the fallout from loss of home equity purchasing power. Since wage growth is typically the way Americans financed consumption in the past, consumption being driven the old fashioned way will assist the US economy in coming months.

Also, the Fed funds rate is at its highest level in 5 years, so there's plenty of room to lower rates to help boost the economy.  There's a prediction of a 50 bp decrease in the Fed Funds rate over the next 9 months.

The Canadian housing sector, in general, has not experienced the same run up in prices, so the threat is far less here.  The issue here is the Canadian Dollar, perhaps even hitting 92 cents this year, causing the Ontario economy to falter below 2% growth rate.  The Bank of Canada will not want to see a higher CDN Dollar.  The prediction is for three 25 bp reductions in prime over the next 9 months or so.  This will help keep the energy driven CDN Dollar from further damaging the Canadian economy.

Bond Yields are also predicted to fall by over 50 bps in the next 9 months.  The markets will likely not worry about another hike in rates and potentially see some rate reductions.