Mortgage woes slowing US growth

SAN FRANCISCO - A CREDIT crunch stemming from turmoil in the sub-prime mortgage market will trigger further weakness in housing and keep US growth 'below trend' most of this year, a UCLA Anderson Forecast unit said in a report yesterday.

The sluggish growth will help clear the way for the United States Federal Reserve to ease monetary policy at the end of the second quarter, despite a historically low 4.5 per cent unemployment rate, the economic forecasting unit said in its report.

Citing Fed chairman Ben Bernanke's recent comments about the link between inflation and employment levels appearing 'looser' than in past decades, the unit projected three cuts to the Fed funds rate by the end of the year, taking it to 4.5 per cent from 5.25 per cent currently.

'Given the level of unemployment, such a move would be unprecedented, but we believe that the Fed is rethinking the role of unemployment in the inflation process,' the report said.

'Thus we suspect that once the Fed accepts the notion that inflationary pressure has peaked and the housing market has started another leg down, policy will be eased.'

Housing data will be key, said Mr David Shulman, the economist who wrote the report: 'If they see the housing numbers coming in as ugly as we do, we think they will ease pretty quickly.'

The housing sector, already suffering from a fat backlog of homes for sale, lukewarm demand and flat to falling prices, is poised for a blow from increasing defaults by sub-prime mortgage borrowers, Mr Shulman told Reuters.

'Housing is subtracting a whole point from gross domestic product,' he said. 'That is going to continue until we hit the fourth quarter.'

GDP will grow by 2.1 per cent in the first quarter, 1.7 per cent in the second quarter and 2.5 per cent in the third quarter, resulting in six consecutive quarters of below-trend growth, Mr Shulman said.

Economic growth will then rise to 3.1 per cent in the fourth quarter to average 2.2 per cent for the year, followed by growth of 3.1 per cent in 2008 and 3.4 per cent in 2009, he added.