The 2007 U.S. economy: So far, not so good

The housing bust gets the blame for pathetic first-quarter economic growth figures. American consumers are finally showing some caution.

Published April 27, 2007 3:32PM (EDT)

If I were a Republican political strategist, this morning's first quarter GDP numbers -- a wimpy 1.3 percent-- would have me reaching for the whiskey bottle. Sure, the presidential election is still 19 months away, but that just gives the economy all the time it needs to sink into a real quagmire. The housing bust is taking its toll, and the bottom has yet to be sighted.

That being said, there has been some good economic news in the last couple of weeks, so it isn't all doom and gloom. But here's the key thing to watch.

On Thursday, the Wall Street Journal reported that the amount American homeowners owe on their home equity lines of credit had declined over the last six months, to $561 billion at the end of March. That's the first such decline since 1999.

During the housing boom, demand for home-equity lines of credit climbed sharply as property values rose, interest rates fell and lenders made it easy for borrowers to tap their equity for everything from home improvements to vacations. Borrowing against home equity freed up roughly $187 billion in cash per year between 2001 and 2005 that was used to pay off other debts and for new spending, according to a recent paper by former Federal Reserve Chairman Alan Greenspan and Fed economist James Kennedy.

Now, the slowdown in home-equity borrowing is leading to weaker sales in some markets for autos, building materials and electronics, says Mark Zandi, chief economist of

As noted in How the World Works at least once a week for the previous year, American consumer spending keeps the global economy chugging along. And for this millennium, at least, the appreciation in value of American homes has provided a substantial portion of the cash for that spending.

Now come the new GDP data. And to James Picerno at the Capital Spectator, the figures for personal consumer expenditures are the numbers to watch.

There's no reason to panic, yet: Personal consumer expenditures rose by 3.8 percent in the first quarter of 2007, which isn't too shabby. But that's still down from 4.2 percent growth in the fourth quarter of 2006. If you've been looking for a trend line to keep tabs on, this might be the one.

(And if you're wondering what consumers are no longer shelling out bucks for, Barry Ritholtz at the Big Picture has an amusing roundup. For example: if you're in the market for a thoroughbred horse, now might be the time to buy -- auction prices are in decline.)

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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