Housing slump expected to drag on...

According to comments made by Bernanke, the sub prime debacle will continue to drag the economy for some time to come as a result of the "knee jerk" reaction of more restrictive lending policies for this segment. Indeed, there has been a strong drop in new construction and building permits lately. There is also a risk that this overflows into other segments. If we also take into consideration that the most recent core inflation figures remain above the 1 to 2% comfort zone, it effectively means that we will not be seeing any Fed interest rate action for a while, possibly not until early next year. One scenario (the most ideal one for the Fed) is that the slowdown is enough on its own to drag the core rate below 2% so that the Fed can shift from a tightening to a loosening bias and focus on employment. Apart from the housing market, capex and consumption are showing signs of weakness. On the other hand the weaker dollar and strong global expansion are factors that counter the drag on U.S. growth. The next few weeks and months should provide us with a better idea on which of the two counter forces end up dominating.