The U.S. economic slowdown intensified in 2007, dominated by a substantial contraction in residential investment (home construction).
Falling home prices and mounting foreclosures tied to subprime mortgages helped to set the stage for turmoil in financial markets, though the roots of the housing crisis go deeper, into the loose monetary policy following the recession in 2000–01, surging home prices, and a search for yield among investors.
Financial turbulence and the consequent freeze-up of lending, in conjunction with rising fuel and other import prices (due in part to the falling dollar), began to weigh on other components of domestic spending.
Overall, U.S. GDP growth eased from 2.9 percent during 2006 to 2.2 percent in 2007, but increased only at a 0.6 percent annual pace in the final quarter of the year. The falloff of U.S. domestic demand continued in the first quarter of 2008.
Although GDP registered another small gain of 0.6 percent during the first quarter (in large measure due to a 0.8 point contribution to growth from stock building), consumption eased to 1 percent growth (seasonally adjusted annual rate [saar]), and business investment dropped 2.5 percent in the quarter from an increase of 6 percent in the previous period.
Net exports added a strong 0.6 points to growth.
This profile—stagnation in domestic absorption, offset by positive impetus from trade—is likely to continue, keeping U.S. GDP growth soft over the coming quarters.
In Europe and Japan, the second half of the year is expected to be weaker than the first, as leading indicators point to weakness in activity over the period three to six months ahead.
Based on these indicators, the strong outcomes for GDP growth in the first quarter, Euro Area (3 percent, saar) and Japan (3.3 percent), are unlikely to be repeated.
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