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Slowdown in Housing Won't Shut Down Economic Growth

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This letter was received after St. Louis Fed President Bill Poole wrote in his July column about the slowdown in housing.

Letter Writer:

Matt Golub

Date Posted:

Sept. 29, 2006


Are you concerned about the impact that a reduction in mortgage equity withdrawal will have on consumer spending? This seems to have been a sustaining factor for GDP growth that may fall off in the future. I look forward to your thinking on the issue.

Mr. Poole’s

First, it's not a given that mortgage equity withdrawals (MEW) will slow down significantly. Freddie Mac reported in August that MEW totaled $155 billion for the first two quarters of the year. In comparison, MEW for all of last year totaled $244 billion, according to Freddie Mac. Even if rising mortgage rates and stagnating home prices significantly cut into MEW for the rest of this year, growth in consumer spending probably will not drop much below 3 percent for the rest of the year. Admittedly, that's a big decline from the first quarter's growth of 5.5 percent, but keep in mind that such a rate of growth was unsustainable by most everyone's judgment. Consumer spending might actually grow somewhat faster than 3 percent, given that nominal average hourly wages are still rising and energy prices are tapering off, if not declining. Both of those should help to sustain consumer spending.

Two other points deserve attention. The economy is operating close to full employment and overall growth needs to be slower than the average over recent years. Second, we can expect growth to shift somewhat away from consumption and toward business investment now that firms are operating closer to full capacity. Given the very low rate of household saving in recent years, we should welcome this change in the mix of GDP growth.