With the housing slump continuing to gnaw at the economy this year, real gross domestic product (GDP) growth should slow to 2 percent, and the Federal Reserve could start cutting rates by September. Overall, short-term rates could be cut by 75 basis points over a series of Fed meetings.

That’s the opinion of economists at Goldman Sachs US Economics. Ed McKelvey, senior economist in that group, outlined Goldman’s economic outlook during a New Jersey Chapter dinner meeting yesterday.

McKelvey offered a plethora of charts with his talk, with several suggesting that housing markets remain weak in many areas and that the homeowner vacancy rate remains one million units above its 1985-2005 average; that oversupply will take considerable time to work through. The effects of that overhang – including foreclosures, layoffs in the mortgage industry and lessened spending from housing-strapped consumers – should knock 1.5 percent points from GDP growth this year, he said.

He added that the Fed has a lot of power to adjust short-term rates to impact the interest-rate sensitive housing market, “so the Fed can provide a lot of support if needed.”

On the labor front, there are signs of slower wage growth in the U.S., and hiring indicators are falling, all pointing to a softening of the labor market. McKelvey also argued that core inflation has been easing gradually, though food and energy prices do pose upside risks to inflation.

Robust foreign demand is helping the U.S. trade balance for the first time in a decade, McKelvy noted. Overall, he concluded, the economy is facing what amounts to a mid-cycle slowdown, and a global recession is very unlikely.

Jeffrey Marshall, Financial Executive

May 16, 2007