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Softer housing market seen dogging economy: Merrill

Posted on: Thursday, 15 December 2005, 12:35 CST

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.

Source: REUTERS

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