by Calculated Risk on 10/28/2006 12:06:00 AM

From the Oct 24th Merrill Lynch forecast: 2007 US interest rate outlook

UPDATE: Bill Cara also has this Merrill Lynch report: The "D" word sets in for the builders — "Desperation"

*[W]e expect that GDP growth could hard-land in late 2007 and early-2008 ...

Click on graph for larger image.

* Unlike the Fed’s view for “limited” spillover effects from the housing correction, we foresee a substantial degree of economic contagion (from the residential construction correction and from a decline in mortgage equity withdrawals).

* In our hard-landing view, this contagion likely will be severe enough to drive the unemployment rate up to 5.8% by the end of 2007 (currently, the unemployment rate is 4.6%).

* In our hard-landing view, monthly US nonfarm payroll growth likely will average 75k to 125k over the very near-term, but that monthly jobs growth should begin to turn negative by 2Q-2007.

If there is spillover from the housing bust into the general economy, the initial impacts will be from the loss of housing related jobs and the decline in mortgage equity withdrawal. I don't think we will have to wait until late 2007 to see if there is spillover from the housing bust - the next few quarters should tell the tale.