Housing Hit to U.S. Economy Nearing End, Economist Minack Says

Bloomberg
Housing Hit to U.S. Economy Nearing End, Economist Minack Says
By Carlos Torres

Nov. 28 (Bloomberg) -- The U.S. housing-market slump has been so severe it’s almost “impossible” for declines in residential construction to hurt the world’s largest economy as much in 2009, said Morgan Stanley’s Gerard Minack.

As housing’s share of gross domestic product has diminished, so too will its influence on growth, Minack, chief equity strategist at Morgan Stanley Australia Ltd. in Sydney, said in a note to clients.

“It is now (almost) impossible for housing to detract as much from GDP growth next year as it has this year,” wrote Minack. “This may have been an extreme cycle for housing, but it is a cycle -- and it seems clear it is in the latter stages of decline.”

The biggest plunge in homebuilding in a quarter century has left housing accounting for just 3.3 percent of U.S. GDP as of last quarter, near a record low and well below the long-term average of around 4.5 percent, according to Minack.

Inventories, another volatile category that often determines the length and magnitude of U.S. contractions, now also makes up a smaller share of the economy, Minack said. The ascendance of the services industry, where inventories of unsold goods are less relevant, explains the change.

“Inventories are set to be a drag in the next quarter or two, but that drag is very likely to moderate thereafter,” according to Minack.

Still, the smaller influence of housing and inventories doesn’t imply the economic slump will be “mild,” Minack said. Economists at Morgan Stanley project the decline in consumer spending, which accounts for about 70 percent of the economy, will be the biggest in the post World War II era, he said. That means the downturn “may even stretch into 2010.”

Last Updated: November 28, 2008 11:30 EST