What Next For The US?

From MoneyWeek:

After the wealth binge - what next for the US?
By Stephen Roach

The modern-day US economy has just gone through its most extraordinary period of wealth creation on record. First equities, then housing - over the past decade American households have added to net worth as never before. That binge is over. With the property market now cooling and equities settling in for an era of single-digit returns, wealth creation is likely to be subdued, for the foreseeable future. There can be no mistaking the profound implications of this development for the American consumer, the global economy, and world financial markets.
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So much for what has happened. It is the prognosis that now matters most. I do not think there is any doubt that the US housing cycle is now turning. The questions pertain more to scope, speed, duration, and depth of the coming adjustments. In an era of financial-market deregulation -especially since deposit ceilings in mortgage lending institutions were eliminated by the early 1980s - residential property cycles have taken on a life of their own. As a result, both the uplegs and the downlegs have lasted far longer than standard business cycles. The data flow has certainly shifted to the downside - namely, mounting inventories of unsold homes, declining mortgage loan applications, rising financing costs, and anecdotal reports from builders and realtors.

A housing downturn will have obvious and important implications for US GDP growth. The direct effects are straightforward: Over the past three years, 2003-05, residential construction activity has boosted real GDP growth by about 0.5 percentage point per year. In data just released for 2Q06, the sector was estimated to have reduced annualized GDP growth by 0.4 percentage point. To the extent the decline in new building activity remains orderly, reductions could continue at the second quarter pace. Relative to the heady gains during the final stages of the boom, that means the contribution of residential construction activity could swing from +0.5% to -0.5% - imparting about a one percentage point drag on overall real GDP growth for at least the next couple of years.
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The trick will be to pull this off without a hard landing. Here’s where my newfound optimism comes into play. As long as G-7 finance ministers, the IMF, and the world’s major central banks remain committed to a rebalancing policy agenda, the odds favor more orderly adjustments in the US and global economy. A withdrawal of excess liquidity by bubble-prone central banks is a key element of this rebalancing agenda. The good news is that this process now appears to be getting under way. The bad news is that the authorities may have waited too long to begin the heavy lifting - leaving a still highly unbalanced world all too vulnerable to any number of exogenous shocks. Either way, there is no escaping the endgame. The wealth binge must be brought to an end if an unbalanced global economy is ever going to end up on safer footing. I think that is exactly what is now under way.