Economic changes predicted for the new year

WASHINGTON — People may feel less inclined to be big spenders this year as the housing market slips from its lofty perch, developments seen as producing slower, though still respectable, economic growth this year.

That is the picture emerging from economists, most of whom are projecting growth to top 3 percent in 2006.

Many analysts are hopeful the high-flying housing market will scale back at a moderate pace, boding well for a safe landing. A crash of a sector that has reliably supported consumer spending and economic activity for five years running could imperil the entire economy.

Rising interest rates and the toll of high energy bills also will play a role in the expected belt-tightening by consumers this year, economists say.

Consumer spending probably will increase by about 2.9 percent in 2006, compared with a projected 3.5 percent rise for 2005, according to the National Association for Business Economics.

The association and other analysts are forecasting economic growth this year of 3.3 percent, compared with a projected 3.6 percent increase for 2005.

Some experts believe the economy will grow at roughly the same pace as it did last year. A few think economic activity in 2006 will not reach 3 percent, a subpar performance.

The government’s tally of 2005’s economic performance, including consumer and business spending, will be known later this month with a report on the gross domestic product. It measures the value of all goods and services produced in the United States and is the most important economic gauge.

Consumer spending accounts for a big chunk of economic activity. Economists are confident that if people’s appetite for new purchases should wane, business investment and other parts of the economy will pick up and temper the decline.

“The mood in the executive suites I visit is generally optimistic,” said Thomas Donohue, president of the U.S. Chamber of Commerce.

Economists believe business spending should firm up as companies boost investment in response to global competition.

It’s that competition that should help keep inflation in check in the U.S. in 2006, economists say. Most foresee consumer prices moderating this year. Yet a big jump in energy costs could undermine the positive outlook.

“The potential for even higher energy prices is a risk to the economic outlook. The economy has digested the higher prices gracefully so far. But it can get a bit of indigestion if prices move higher,” said Mark Zandi, chief economist at Moody’s Economy.com.

The jobs climate is expected to improve slightly this year. The average unemployment rate should drop to 4.9 percent or 5 percent from last year’s 5.1 percent, economists said. The economy is expected to add around 2 million jobs this year — about the same as last year.

Home prices, after double-digit gains over the past several years, have helped power consumer spending. Borrowing against homes added $600 billion to consumers’ spending power in 2004, according to research by Federal Reserve Chairman Alan Greenspan.

Prices are not expected to go up as much this year and, according to analysts, could fall in some markets. That would make some homeowners feel less wealthy and more cautious in their spending, economists say.

“2006 is going to be a wake-up year for many homeowners,” said Greg McBride, senior financial analyst at Bankrate.com.

“Consumers have been using their house as an ATM. That is going to diminish considerably over the next several years” as the housing market slows, he said.

The Federal Reserve is expected to continue bump up interest rates this year. But central bank officials have suggested that the end of a nearly two-year rate-raising campaign may not be far off.

The Fed in December lifted a key short-term interest rate, known as the federal funds rate, to 4.25 percent; that’s the highest rate in 4 1/2 years.

The funds rate, the interest that banks charge each other on overnight loans, affects other interest rates.

The Fed’s action last month meant that the prime lending rate — for certain credit cards, home equity lines of credit and other loans — rose to 7.25 percent. That also was the highest rate in 4 1/2 years.

Many economists believe the funds rate will climb to 4.75 percent this year, which would push up the prime rate to 7.75 percent. Others predict the funds rate will go to 5.50 percent this year, leaving the prime rate at 8.50 percent.

Against a backdrop of rising interest rates, analysts suggest that would-be home buyers and other borrowers lock in loans with a fixed rates, versus a variable rate, sooner rather than later.

Rates on 30-year, fixed rate mortgages, now at 6.21 percent, could top 7 percent by year’s end, according to some economists’ projections.

(Associated Press)