Economy shows strength; forecasters see risks

“It may very well be the case that speculators are beginning to have difficulty selling higher-priced homes and banks are beginning to back away from financing speculation in higher-priced homes,” he said.

So far, he said, it appears the air is coming out of the housing bubble gradually. “It is, however, too soon to dismiss the risk of a sharp decline in prices as speculators race for the exits,” he said.

There are other risks to the outlook, too.

One is the national savings rate, which has dropped to zero, the lowest October 2001, when the rate briefly turned negative. That means much of this year’s strong spending has been fueled by consumers draining their savings, which eventually will need to be replenished.

Consumers seem to be weathering the high price of oil, but analysts still worry that it could work its way further into the economy in the form of high inflation.

And the Fed itself poses a risk as the steady drip of higher interest rates is bound to take a toll on economic growth.

The Fed’s expected rate hike Tuesday will be the 10^th in 14 months, bringing the overnight federal funds rate to 3.5 percent, compared with 1 percent when the cycle began last year. The risk that the Fed could overdo the rate-hike cycle and possibly send the economy into recession was the No. 1 worry mentioned in a quarterly survey of investment managers at Russell Investment Group, said Noel Lamb chief investment officer for the Tacoma, Wash.-based firm.

“Higher short-term rates mean consumers face higher amounts on such payments as adjustable-rate mortgages and credit cards, leaving them with less discretionary cash, which, in turn, could dent both the housing market and corporate revenues,” he said in a commentary.

And while the latest batch of data has boosted the consensus forecast for the second half of the year, not everyone is a believer.

Much of the inventory decline in recent months stems from aggressive incentives offered on U.S.-made cars, creating sales spikes that seem unlikely to be repeated.

“We’re not getting carried away,” said John Silvia, chief economist for Wachovia Securities. He is still calling for growth of 3 to 3.5 percent in the second half of the year, in line with the economy’s long-term growth rate.

“I think the inventory gains are going to be more modest than what is expected,” he said.

Silvia pointed out that there are no visible catalysts for a reacceleration of economic growth. No major tax cuts are in sight, energy prices appear unlikely to drop sharply and the Fed is taking away stimulus rather than adding it.

David Rosenberg, chief North American economist of Merrill Lynch, said the Fed’s rate tightening cycles have always managed to “expose and purge the excesses of the day,” and likely will do the same in areas where housing is overheated.

The lags between when rates are raised and when their impact is fully felt in the economy are “long, variable and insidious,” he said. “Maybe we won’t see it until next year,” he said. “It’s just a matter of time.”

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