This can't last forever, but does it need to end just yet? That's the question facing economists as they take a final look at 2006′s combination of solid growth, surging corporate cash and profits with an eye on prospects for 2007. Broadly speaking, economists predict a slowdown in all three, but opinions vary widely on how sharp a deceleration to anticipate. According to the December Blue Chip Economic Indicators report, the consensus of 54 economists calls for gross domestic product growth of 2.4% in 2007, the slowest expansion since 2002. That compares with the estimated 3.3% for 2006. The group predicts a substantial slowdown in corporate profit growth–5% in 2007 versus the heady 19.8% in 2006. "The two biggest drags on the economy for the last couple of quarters have been the recession in housing and in automotive," says Randell Moore, executive editor of the Blue Chip Economic Indicators. Whether those sectors contract further will be key for how much of a slowdown the nation experiences. As for the outlook for recession, the consensus placed the odds at a low 28% for the coming 12 months. Treasury & Risk has asked three Wall Street economists to spotlight the factor that they believe will be most influential: Paul Kasriel from Northern Trust Co., Milton Ezrati from Lord Abbett & Co. and Stephen Stanley from RBS Greenwich Capital.

Led by the recession in the housing sector, U.S. economic growth has decelerated to a rate below its potential and is likely to remain below potential throughout most of 2007. The weakness in housing already has and will continue to have a negative impact on many sectors of the economy, but none more important than its effects on consumer spending.

The housing slowdown is felt on two fronts. Firstly, the boom in housing played a large role in job creation during the current economic expansion. Employment growth will now be retarded by the housing recession, which, in turn, will slow the growth in consumer spending. Secondly, with house prices now falling, the growth in home equity will slow. Because mortgage equity withdrawal has supported household deficit spending in this cycle, the reduced growth in home equity also will slow the growth in consumer spending. Given that businesses failed to embark on any kind of a real capital-spending spree earlier in this expansion when households were, it is difficult to argue that businesses can now fill the void created by contracting consumer spending.

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