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WASHINGTON: The US economic
expansion suddenly seems more fragile than thought just weeks
earlier, after a sharp downward revision to the past quarter’s
growth and renewed fears about the slump in real estate.
The latest
revision to US gross domestic product (GDP) showed the world’s
largest economy expanded at a tepid 2.2 percent pace in the fourth
quarter, instead of the 3.5 percent growth spurt in the official
estimate a month earlier.
That was the
sharpest downward revision in a decade, and was attributed to weak
business spending and a draw down of inventories from cautious
firms.
Still, most
forecasters say the economy will muddle through 2007 at a sluggish
pace, in line with Federal Reserve forecasts.
But some say
the picture is more shaky than it appeared a few weeks ago. And many
are renewing forecasts for interest rate cuts by the Federal Reserve
sometime this year to help pick up the pace of economic activity.
Manufacturing
has been sluggish, highlighted by the 7.8 percent drop in durable
goods orders last month.
And some say
the US has yet to see the full effect of the housing downturn,
reflected in the 19.1 percent slide in residential investment in the
fourth quarter.
The end of the
real estate boom has resulted in high failure rates among risky or
“subprime” mortgages, given to borrowers with below-average
credit ratings, and some say this crisis could spill over.
“We are
seeing cracks in this easy-money-now-not-so-easy environment,”
said Andrew Busch, analyst at BMO Nesbitt Burns.
He said 20
subprime lenders “have either shut down or been forced to shut
down” and more failures are expected. While most major banks are
not in the sector, a wave of failures could spread throughout the
financial system, some warn.
Stephen
Gallagher, economist at Societe Generale in New York, said the
subprime lending pullback “is a mini crisis that raises questions
about complacency in general.”
“It has
become a case of extreme illiquidity that tends to shake out weaker
hands,” he said.
Another
concern is the rise in the Japanese yen, which could hurt the
so-called “carry trade” that provides liquidity to the US and
other markets.
These concerns
have whipsawed global equity markets, which saw one of the worst
weeks in years, sparked by a nine percent plunge in Shanghai’s
stock market on Tuesday.
“Hedge funds
borrow yen at very low interest rates to fund US investments. When
the yen strengthens, it makes the repayment of those loans more
expensive,” said Dick Green, analyst at Briefing.com.
“So, perhaps
a rising yen will force some hedge funds to sell stocks to cover
exchange rate losses. Perhaps.”
Paul Sherard,
economist at Lehman Brothers, said there may be some economic
turmoil ahead but he sees no major crisis.
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