"Consumers are likely to pull back a bit in early 2007, but firm fundamentals will help support economic gains in the second half of 2007 and in 2008."
Last year, the slowdown in the U.S. housing market and run-up in interest rates raised numerous red flags for the economy, especially related to the refinancing and sub-prime mortgage markets. After several years of annual gains of between seven and 11 per cent, growth of house prices stalled in mid-2006 and then dropped into negative territory at year end. However, the housing market is starting to show signs of stability, as existing home sales have improved and mortgage applications have increased for the first few months of 2007.
"Risks to consumer spending and the economy was limited as more than 80 per cent of U.S. households are immune to interest rates changes. One third of all homeowners have no mortgage debt and 50 per cent have mortgages with a fixed rate," noted Wright.
RBC expects businesses will continue to spend but at a more moderate pace in 2007. Healthy corporate balance sheets with low debt-to-equity ratios and stellar profits have provided businesses with the opportunity to redeploy capital for equipment, software and structures to boost productivity.
According to the RBC report, last year, the U.S. economy generated strong employment growth but the pace is expected to slow in 2007 to 1.3 per cent. Wage gains are at their highest since 2001 and will continue to improve. The unemployment rate stands near a five and a half year low but will rise moderately in 2007.
"Rising core inflation will keep the U.S. Federal Reserve from significantly easing interest rates this year," noted Wright. "Stronger growth in 2008 will see the Fed shift into rate hike mode with a 50 basis-point increase expected in the second half of the year. "
