Vermont American 2 Inch Reduced Fractional

Things seem to be moving in slow motion this year. We are all still alive and well, when in fact by now we must be all dead and buried – according to a good deal of prognostications I was reading all the way back in mid-December 2006, that is.

For the past few years the economies of North America have systematically defied the naysayers. Time and again the Cassandras who anticipated trouble – whether a bubble explosion and the consequent crash of housing prices or the collapse in buyer spending followed by the crash of the American Dollar – were proven wrong. This year does not seem to be the exception, at least for now. Particularly the ‘bubbleologists’ – those people who have made the goal of their lives that of exploring the Milky Way with their economic telescopes looking for bubbles ready to collide with our planet – seem to be in particular wrong.

To be sure, the housing boom has ended dragging down the pace of overall economic growth. But the housing ‘correction’ – as analysts are now beginning to call it – did not have calamitous consequences. In particular, we have not seen a recession in 2007 since – as I did expect at the end of 2006 – rather than slashing interest rates to stave off a slump, Central Banks both in the United States and Canada have concentered more on inflation. Especially in the United States, after twenty-four months of steady interest-rate rises that have in the end caught up with American serial borrowers, spending is now set to be a lot softer, which is a good thing overall. And the household saving rate, which in the last quarter of 2006 dipped to a negative 0.5 percent, has at last started out to inch up.

Even the so much anticipated flood of defaults on mortgages and the consequent rise in loan delinquencies has failed to put a dent in the economy. Most household remainder sheets are strong sufficient to withstand a drop in house prices. With buyer spending lower but not stagnant, overall economic growth this year is forecasted to be a little less than 2 percent for the United States and a little more than 2 percent in Canada – under it is potential but not precisely a slump.

So, where does the foregoing scenario leave us and what may we somewhat suppose the future to fetch in the forthcoming months?

There is no question that 2007 is going to be a sluggish year, and a sluggish year is precisely what we need both to stem external imbalances and keep inflation underneath control. Allowing the economy to get an even footing through a slowdown of capital appreciation and at the same time permitting real wages to catch up is incisively the tonic necessitated for a healthful foundation. In frequent lines spending fuels consumption, which in turn erodes a fixed amount of resources. This is the conception behind inflation in an economy founded on scarcity of goods, which is typical of all capitalistic economies. As a direct and proximate result, therefore, controlling inflation is the key.

Core inflation, which excludes the volatile categories of feed and fuel, is well above the 2 percent that Central Banks here in North America deem comfortable. Central Banks, therefore, will need to be exceedingly vigilant all around the remainder of the year because the economy’s natural ‘speed limit’ – specified as the rate of GDP growth that may be sustained without fuelling inflation – has slowed down. The two drivers that determine how fast an economy may safely grow – the number of employed laborers and their overall productivity – are both flagging.

Unusually rapid productivity growth has been the source of economic strength in Real Estate over the past few years. But in 2006, as the stocks of unsold houses soared, builders cut back sharply after a multi-year construction binge. The pace of residential building fell by a fifth, sufficient to drag overall output down by one full share point. This year, conversely, the slump in construction has eased up already as builders have worked off a good percentage of their exuberant inventories. Adjusting to the shift in growth may not be easy for everyone, but utterly necessary in order to refrain from a recession.

And on the bright side of things, with growth strong in the rest of the world slower spending in North America may reduce the mammoth trade deficit without a severe dent in the overall global growth.

Luigi Frascati