US overview:The US housing market is set for a hard landing as repossessions are on the up, writes Denis Staunton.

It was an especially merry Christmas on Wall Street this year, with Goldman Sachs employees sharing a bonus pool of $16.5 billion (€12.5 billion) and Lehman Brothers paying out almost $9 billion to high-achieving staff.

Goldman Sachs chairman Lloyd Blankfein took home a bonus of $53.4 million, the highest yet for a Wall Street chief executive and the bank's employees are enjoying an average stocking filler of $622,000.

This year's payouts were high enough to trigger a bout of soul-searching in US newspapers, accompanied by reminders that millions of Americans cannot afford to feed their children properly or to insure their health.

Perhaps the most striking fact about Wall Street's bumper Christmas, however, is that it came as all US economic indicators point to lower economic growth in 2007 - with a real danger of full-scale recession.

Most analysts expect GDP growth to slow from an expected 3.1 per cent in 2006 to about 2.6 per cent by the end of 2007.

Even if the slowdown is sharper, most forecasters are predicting a "refreshing pause" like that of 1995 rather than a painful contraction as in 1991 or a prolonged recession such as those in the mid-1970s and early 1980s.

The fate of the US economy could hinge on the housing market, which fell sharply in 2006 following a sustained period of speculation, overbuilding and soaring prices. Housing construction did rise by 6.7 per cent in November, persuading a few optimists that the market is preparing to recover in early 2007.

November's rise followed a spectacular fall of almost 14 per cent in October and housing construction in November was still 25.5 below the level of a year ago.

Applications for building permits, considered a good indication of future construction activity, fell for the 10th month in a row.

The fall in the housing market has already forced builders to lay off thousands of construction workers and sliced as much as 1 per cent off annual GDP growth.

Worse may be yet to come, however, as falling house prices hit consumer spending, which has been the motor behind the US economy in recent years.

With wages stagnant, US homeowners have been raiding their homes for equity as prices have soared, funding the spending spree that has kept the US economy afloat.

Rising interest rates - the Fed rate is now pausing at 5.25 per cent and house prices that have stabilised or fallen has seen the inventory of existing homes for sale soaring.

At the current rate of sales, there is now nine months worth of apartments and seven months worth of family homes on the market, leading some economists to predict that prices could fall by as much as 10 per cent during 2007.

As the Federal Reserve considers what to do about interest rates, pressure for an early cut to 5 per cent is offset by fears that inflation may be edging upwards.

Some central bankers argue that the inflation risk is so great that the Fed should actually increase interest rates, although the central bank's board this month expressed concern about the "substantial cooling of the housing market".

A hard landing for the US housing market is all the more dangerous because banks and other financial institutions have been increasingly liberal in offering mortgages to home buyers, some of whom are finding it increasingly difficult to meet repayments.

Treasury secretary Henry Paulson has taken to urging financial institutions to avoid making risky loans to customers that will get them too deep into debt and result in likely repossessions.

His advice may have come too late, however, and foreclosures have already become such a feature of the US housing market that newspapers are offering consumer guides on how to snap up repossessed homes at bargain prices.

For corporate America, two decades of restructuring and cost-cutting have left profits at their highest level per unit of real GDP since the 1960s.

The profit boom may now be over, however, as wages start to inch upwards, but many firms still enjoy huge cash reserves - a factor that will ease the pain of a slowdown in profits.

The weakening dollar will boost exports and will swell the dollar value of profits earned outside the US.

The recovery in Europe and Asia is driven more by strong domestic demand than by exports, so the current US export boom should endure as the dollar weakens further.

The Democratic takeover of Congress, which takes effect on January 4th, will affect individual sectors, making life more difficult for the pharmaceutical and oil industries while boosting innovative sectors such as alternative energy.

The change of congressional control is unlikely to have a major impact on the US economy as a whole, however, despite promises to increase the minimum wage and to question the future of some tax cuts.

The most significant economic impact of the new Congress may be to hasten the demise of the Doha round of world trade talks, which has resisted every attempt at revival.

Senior officials in Washington and Brussels acknowledge privately that there is little hope of saving the round, despite public declarations that a deal is within reach.

"Nobody wants to be left holding the dead baby," one official said.

However, if Congress refuses to extend Mr Bush's authority to negotiate a deal without the possibility of amendment, the round will be truly dead by the summer and the transatlantic blame game will begin in earnest.