Slower economic growth and rising inflationary pressures are cited as competing trends in the U.S. economy by Freddie Mac in its monthly Economic Outlook for August which was released on Wednesday.

The report contrasted the growth in the economy during the first half of the year which was perking along at 4 percent (annualized) but is expected to be at a 3 percent level the second half of the year and inflation which was a moderate 2.2 percent in the first quarter of the year then reached 5 percent in the second half, driven largely by the price of energy and labor.



The economy, according to July employment numbers released by the Department of Labor, produced only 113,000 jobs and unemployment increased by .02 percent to 4.8 percent, which is counterbalancing the risk of energy driven inflation.

Slowing growth and rising inflation are squeezing the housing sector because the former causes family incomes to rise more slowly and the latter has been driving interest rates higher. The housing sector is no longer fueling the economy as it has since the 2001 recession the report concedes, but 2006 will still be the third strongest year for home sales in history and residential investment and housing consumption are still contributing strongly to GDP growth. Investment was contributing about 6 percent and housing consumption around 10 percent during the first half of the year.

Echoing information from a second quarter report on refinancing released earlier in the week, the Economic Outlook states that homeowners are combating rising risks in the economy through refinancing; trading in adjustable rate mortgages for fixed rate products and consolidating first and second mortgages into first mortgage loans to lower monthly payments. The report estimates that $500 billion in first mortgages and $650 billion in second lien loans will be refinanced this year and that a total of $155 billion was pulled out of home equity through refinancing in the first half of the year. However, the report points out, as house price appreciation slows, homeowners will be increasingly unable to use such refinancing to balance higher interest rates with slower income growth.

Looking forward, Freddie Mac economists have made some small changes from last month's projections. For example, growth in the GDP was scaled back for the remainder of this year and for 2007 from 3.6 to 3.5 percent and 3.3 to 3.2 percent respectively.

Housing starts are dropping due to slowing housing market activity and figures for the second quarter came in at 1.88 million units for the second quarter which was below the July estimate of 1.91 million. Consequently Freddie downgraded the forecast for the end of the year from 1.92 million to 1.90 million units. This does not include condos. The report points out, however, that this is still 50,000 more units than were built in 2003.

Home sales are also slowing slightly faster than anticipated. They were down 5 percent in the first half of this year compared to 2005 and Freddie is now projecting 6.90 million single family home sales in 2006 and 6.46 million units in 2007. The July Forecast projected slightly higher sales of 6.96 million in 2006 and 6.49 million in 2007. The estimates for price appreciation, however, were up slightly from last month - 7.1 percent this year and 6.4 in 2007 compared with July estimates of 7.0 and 6.2 percent.

Single-family mortgage activity is expected to run 13 percent behind last year, primarily because of decreasing refinancing activity which represented 44 percent of all applications in 2005 but will drop to 38 percent this year. At the same time the total outstanding mortgage debt will be up 12.6 percent in 2006 from 2005 reflecting still strong construction, sales, and cash-out refinancing activity.