Housing remains in a slump because of a combination of factors: increased mortgage rates earlier in the year, a belief among prospective homebuyers that falling housing prices will decline further and the sheer exhaustion of the housing market from its furious sales pace in the past two or three years. But this decline is likely to hit bottom early next year. Indeed, we have already been seeing tentative signals of that, as existing home sales have crept up lately in places and mortgage rates have fallen a bit, too. Malpass thinks "the housing slump should begin to stabilize, but at a reduced level, after the first quarter."
This is not to dismiss the gradual slowing down of our economy as we enter a self-correcting period after the furious growth spurt of the past three years. The economy was expanding at a robust 5.6 percent growth rate in the first quarter, slowed to 2.6 percent in the second quarter and slowed a bit more to 2.2 percent in the third. Fourth-quarter growth will be around 2 percent, signaling the economy is still growing as it heads into calmer waters in the new year.
Meantime, Wall Street has been signaling increasing confidence in the economy based on strong corporate earnings and the hope that the Fed might even cut interest rates in the short term.
The Commerce Department's Bureau of Economic Analysis' estimate of corporate profits for the third quarter showed a 30.9 percent increase over the third quarter of 2005. That's the kind of growth the stock markets love and another sign the economy is still running on all cylinders.
That's why the Dow Jones Industrial Average was in the 12,300 range last week, swelling worker 401(k) retirement accounts and boosting federal revenue that has sharply reduced the budget deficit.
But all this will be endangered next year if the new Democratic majority in Congress seeks higher tax rates, draconian regulations on business and a reversal of free-trade policies.
Just the opposite is needed: lower tax rates on income and investing, further deregulation of our economy, including oil and gas exploration in the Gulf, and expanded trade agreements to open new markets for U.S.-made goods and services. These issues are going to be at the forefront of congressional debate next year. Let's hope the advocates of entrepreneurial opportunity, growth and wealth-creation win.