IMF: Housing Market Could Slow U.S. GDP

Headlines (Scroll down for complete stories):
1. IMF: Housing Market Could Slow U.S. GDP
2. Shell CEO: No Shortage of Oil
3. Are Consumers Finally Slipping?
4. Report: Ford Facing Big Loss

1. IMF: Housing Market Could Slow U.S. GDP

The U.S. economy is headed for a slowdown caused by a cooling housing market, the International Monetary Fund warned Thursday, and that could drag on global growth. But China's booming economy shows no sign of slowing down, and that prompted the IMF to raise its global growth forecast for this year and next.

The IMF revised downward its forecast for U.S. economic growth to 2.9 percent for 2007 from an estimate of 3.3 percent in April. This year, the U.S. is seen expanding 3.4 percent, the fund projected in its semiannual World Economic Outlook.

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But as U.S. growth appears to falter, much of the rest of the world has picked up steam, it said.

In addition to China, both Japan and Europe are expanding and the IMF raised its forecast for global growth to 5.1 percent this year and 4.9 percent next year -- both up a quarter point from April.

"This is really the fourth year of very strong global growth," said Raghuram Rajan, the fund's chief economist in Singapore, where the IMF and its sister institution, the World Bank, will be holding their annual meeting next week.

Still, the IMF warned that inflationary pressures, high oil prices and a possible abrupt slowdown in the U.S. economy could restrain global growth.

"This strong central forecast is surrounded by more uncertainty than usual, with risks tilted to the downside," Rajan said.

"The forecasted (U.S.) housing slowdown is well and truly here," he said. "Indeed, rising inventories of unsold houses suggest things will get worse before they get better."

Last month, the Commerce Department reported that sales of new homes dropped 4.3 percent while the inventory of unsold homes climbed to a record high.

The IMF also said further U.S. interest rate hikes might be necessary as inflation remains a threat.

The Federal Reserve "faces a difficult situation of rising inflation in a slowing economy, but given the importance of keeping inflation expectations in check, some further policy tightening may still be needed," the report said. In August, the Fed decided to keep its key short-term lending rate at 5.25 percent after 17 straight hikes dating back to June 2004.

The U.S. could help reduce global imbalances by setting a more ambitious deficit reduction path and put the budget in a stronger position to respond to future economic downturns, the IMF said.

"Boosting national saving in the United States -- through fiscal consolidation and increased private saving -- is a key component of the multilateral strategy to reduce global imbalances," the report said.

Meanwhile, the IMF predicted that China's economy would continue to surge, rising 10 percent both this year and next, propelled by surging exports. But it expressed concerned about China's construction boom, which authorities have been trying to restrain.

The Washington-based fund also urged Beijing to raise the value of its currency, the yuan, saying that would help to cut its huge global trade gap -- on pace to surpass last year's $102 billion -- and bolster households' purchasing power.

Japan, the world's second-largest economy, will likely grow 2.7 percent this year on the back of solid domestic demand, but should ease next year to 2.1 percent, the IMF said.

Japan should be careful to raise interest rates gradually to avoid a "costly" reemergence of deflation, or falling prices.

In the 12-nation zone that uses the euro currency, stronger corporate balance sheets have helped bring about increased investment, rising employment and a more balanced expansion, the report said. Growth would rise to 2.4 percent in 2006 before moderating to 2 percent in 2007 largely due to scheduled tax increases in Germany, the report said.

Other risks to the outlook include further increases in oil prices, the fund said.

"Supply concerns have played a growing role in pushing up oil prices, and a major disruption in a large producer or a further escalation of security concerns in the Middle East could well lead to another upward oil price spike," the IMF said.

Also Thursday, the World Bank and IMF accused Singaporean authorities of breaching an agreement with the two institutions by barring 27 activists from entering the country to attend the annual meetings.

"We're very displeased with the current state of affairs," said Kevin Shaw Kellems, senior adviser to World Bank President Paul Wolfowitz. "There was not an indication until late in the game that there was going to be a problem."

The dispute highlighted tension between Singapore's strict controls on politics and expression, and efforts by the IMF and the World Bank to be more open to the views of grassroots groups that have accused them of elitism. It also threatened to taint Singapore's efforts as host of the Washington-based groups to showcase its economy and hospitality on a global stage.

Singaporean authorities said the city-state was "aware of its obligations under the MOU (memorandum of understanding) and would continue to honor them."

"However, the MOU also obliges Singapore to take all necessary measures for the safe passage of all persons in and out of Singapore and for their personal security and the safety of their property and the property of the organizations and delegations," a government statement said.

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2. Shell CEO: No Shortage of Oil

Shell CEO Heroen van der Veer, in an interview with Newweek's Rana Foroohar, says that the recent drop in oil prices was to be expected and that there is no shortage of oil reserves.

Van der Veer comments to Foroohar that stocks of crude oil are "very normal or even better than normal." He says, "lines of ships at refineries, and things like that, are OK."

Van deer Veer says because there is no "physical shortage in the world" it is difficult to predict oil prices. Prices are determined by "geopolitical tensions in the world and the amount of nontraditional money like hedge funds moving into the oil market." He notes that estimates say hedge funds are investing more than $100 billion in oil markets right now.

When asked for a specific prediction, van deer Veer says that Shell does believe that "future prices will be significantly lower today."

Van deer Veer says that Shell's future lies in so-called elephant projects, which are expensive, complex projects usually involving unconventionals, such as oil shale, oil sands, and deepwater reserves. Currently Shell is operating such projects in Sakhalin in Russia, Bonga in Nigeria, and Nanhai in China. The company expects to expand these programs to 10 in the next decade.

Van deer Veer also expressed concern about a windfall tax being levied on oil companies. The U.S. government, angered by high energy prices at the same time that oil companies are pulling in record profits, has threatened to institute a windfall tax. But van deer Veer says that a windfall tax would cut into the money that the company has earmarked for discovering new oil supplies.

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3. Are Consumers Finally Slipping?

Consumers are the spokes in the wheel of a rolling economy. Consumer spending accounts for more than two-thirds of economic activity in the U.S. So when consumers show signs of running out of gas, the entire economy may be in trouble.

Such is the case with retail sales. Retail sales rose just 0.2 percent in August, down from a 1.4 percent increase in July. Excluding auto sales, which can be volatile, retail sales still rose just 0.2 percent versus a 0.6 percent rise in July.

Economists had predicted a decline of 0.2 percent for overall retail sales because of an expected slump in auto sales. Automakers had warned of a sharp drop in U.S. auto sales last month.

"I am puzzled by this report. There seems to be somewhat of a disconnect," Scott Hoyt, economist with Economy.com, comments to CNN Money. "Whenever you've got a strange disconnect like this, you almost always have to anticipate [a downward revision next month]."

Ian Shepherdson, chief economist with High Frequency Economics, wrote in a note, "Overall, this report is softer than it looks. The headline is flattered by an inexplicable increase in auto sales, which cannot be squared with the 6.3 percent drop in unit sales reported by the automakers. Expect a downward revision."

Sliding energy prices didn't offset the impact of a slumping housing market on consumers, says CNN Money.

"It's easy to overdo the gas price effect," Scott Hoyt tells CNN. "Housing has a more serious consequence on spending patterns because slowing housing activity has an adverse effect on household wealth and mortgage equity withdrawals. With a cooling housing market, consumers have less cash to pull from their homes to spend elsewhere like electronics and furniture."

In the recent housing boom, rising home prices were creating equity, allowing homeowners to draw on a line of credit or refinance their homes to get cash. Now that home prices have stabilized, and in some areas have dropped, that option is no longer available to homeowners. As a result, the "wealth effect" vanishes.

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4. Report: Ford Facing Big Loss

A Ford financial report forecasts a loss of up to $9 billion this year, according to insiders at the firm.

The Detroit News today reported that Chief Financial Officer Don Leclair's office said that a financial forecast report called "Automotive Profit Forecast" showed that the company might post a pretax loss of $5.6 billion to $5.9 billion for 2006.

The newspaper cited a senior Ford official who said that restructuring costs could bring the total loss to $9 billion for the year.

The Detroit News says that a report by Erich Selle of JPMorgan Securities projects an $8.4 million loss this year.

"If it's going to be bad, you might as well make it really bad," David Cole, chairman of the Center for Automotive Research tells the paper. "Really, it's a matter of survival. Ford got hit really hard, and it's going to be worse in the third and fourth quarters."

Ford spokesman Oscar Suris wouldn't confirm or deny the report. "We do not verify authenticity of any secret or confidential information improperly shared outside the Ford Motor Company," said Suris.

The Detroit News says the report shows the North American auto business to be the main culprit behind Ford's sinking earnings. But the report also says that, with the exception of its South American operations, every other arm is losing money, too.

Ford's Board of Directors is scheduled to meet today to discuss "intensifying the pace and scope of the company's turnaround effort," says the Detroit News. Ford's ‘Way Forward' campaign includes buyout offers and other actions to cut costs.

"That's why this restructuring plan has got to be perfect," says BNP Paribas analyst Bradley Rubin to the paper. "They've got to get 40 to 50 percent of the people out the door. It's just got to be a lot smaller company."

Editor's Note:

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Editor's Notes:

One expert tells Financial Intelligence Report that housing prices nationwide could fall by as much as 40% over the next few years. Find out how the five ways to protect yourself and profit from the coming real estate crisis. Go here now.
In April 2004, Financial Intelligence Report predicted that oil prices would skyrocket from $29 per barrel to over $60 within a year. That forecast was dead-on. Our investors made a fortune on that advice. Since then FIR has been warning that oil prices would collapse in the next 12 months and could go as low as $40 per barrel. Discover the top 5 ways you can profit from the coming Oil Bust. It's already begun! Go Here Now.
Three steps to success! Discover how you can multiply your profits and cut risk down to size in three easy steps. Go here now.
Discover how to outperform stocks by 500% this year with one of the safest investments available. Go here now.
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