Softer housing market seen dogging economy: Merrill

NEW YORK (Reuters) – A softening U.S. housing market poses
the greatest risk to economic growth next year as fallout from
a housing slowdown would hurt consumer spending, Merrill Lynch
said in its U.S. economic and financial markets forecast for
2006.

The forecast by economist David Rosenberg and quantitative
strategist Richard Bernstein, said consumers faced “significant
headwinds” from higher interest rates, rising energy prices,
increased medical costs pushed back on them by employers and
shrinking real wage rates.

“From our lens, the U.S. housing market has become
seriously overextended and a correction looms, posing the
largest risk to 2006 consumer spending,” Rosenberg and
Bernstein said in their forecast report.

They also noted that despite the belief of many investors
that the U.S. economy has a chance to accelerate meaningfully,
“the slope of the yield curve, perhaps the best economic
forecaster of all, continues to flatten,” even raising the
prospect for an inversion.

“Although an inverted yield curve does not always imply
economic recession, it has predicted a profit recession 100
percent of the time,” the pair said. “We think investors should
be searching for the origins of the slowdown in nominal growth
that is flattening the yield curve,” they added.