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Strong Employment, Sound Economy Offset Housing Slump: Economist

Tuesday, 19 Jun 2007 | 11:26 AM ET

Robert Mellman, senior U.S. economist for J.P. Morgan, told CNBC’s “Morning Call” that strong employment and a sound economy have offset the housing slump.

Economy Withstanding Housing
Insight on why housing has not hurt the economy, with David Kelly, Putnam Investments managing director & sr. economic advisor; Robert Mellman, JP Morgan senior U.S. economist and CNBC's Michelle Caruso Cabrera

“The unemployment rate is still at its lows and we haven’t had much impact on the rest of the economy,” Mellman said Tuesday. “If you go back to previous housing downturns, they were associated with downturns in the economy. Going into the downturn, the Fed tightened, long-term interest rates got high, credit spreads came in and all sorts of financial conditions tightened. This is a very different kind of housing downturn and financial conditions are pretty easy across the board and the rest of the economy continues to chug along.”

Mellman said core inflation is declining and consumer spending is likely to pick up in the second half of the year. Nevertheless, he expects the Federal Reserve to raise interest rates, probably in December.

David Kelly, managing director and senior economic advisor for Putnam Investments, said residential construction has declined by 16% in the last year and clipped more than 1% from GDP growth. But the stock market remains strong.

“If people were really worried about home values and the stock market was falling at the same time, we might have more of a problem,” Kelly said. “But with the stock market going up, people don’t feel bad about their wealth.”

He said illegal immigration appears to be masking the decline in home construction employment.

“If you look at the government’s official data on construction, it doesn’t show a fall off,” Kelly said. “Of course, if these guys were never on the books, they’re never going to fall off the books.”