Although the labor market has softened and consumer sentiment has declined sharply since last fall, consumer spending has thus far held up better than expected. The economy should be supported by monetary and fiscal stimulus, a reduced drag from residential construction, further progress in the repair of financial and credit markets, and still-solid demand from abroad. However, the economy faces challenges.
With housing construction continuing to decline and energy prices continuing to rise, risks to growth still appear, to my eye, to be to the downside. Households face significant headwinds, including falling house prices, tighter credit, a softer job market, and higher energy prices.