esrb. it is vital that the politicians now stick to their previous commitments and do whatever else is needed to restore market confidence. to limit potential adverse spill - overs, the esrb has also discussed how to improve the resilience of the eu financial system. the esrb has highlighted the importance of the stress tests performed by the eba, the european banking supervisors – not least as a way to improve the transparency of the financial system. the esrb has therefore called on the competent authorities in the eu and its member states to contribute to clear and rigorous assessments of the banks involved. it has also called for national private or public back - stops to be put in place to deal with the potential need for bank capital. last week, the esrb sharpened this message asking supervisors to coordinate efforts to strengthen bank capital. i find the stress - testing to be a very useful exercise. i also believe that the disclosure of relevant data is an important tool for building market confidence, reducing uncertainty and promoting financial stability. however, there is still room for improvement. no doubt the macro - scenario could have been more conservative and possible contagion between banks and countries could have been handled better. the esrb will have an important role to play in the construction of future stress tests. bank funding vulnerabilities in june, the esrb also pointed out that bank funding vulnerabilities could pose a threat to financial stability. the esrb noted at the september meeting the progressive drying - up of bank term funding markets, and that the availability of us dollar funding to eu banks also had decreased significantly. in sweden, we have, for some time now, highlighted the risk of swedish banks ’ reliance on short - term funding in foreign currency. the riksbank ’ s stress tests indicate that the swedish banks have a good capacity to handle bigger loan losses, but that they take somewhat larger liquidity risks than many other european banks. lending in foreign currency the esrb has also looked into the risk stemming from lending in foreign currencies to unhedged borrowers. this risk has been highlighted by recent fluctuations of some currencies and the potential impact on unhedged household ’ s capacity to repay loans taken out in foreign currency. in view of this, the esrb has developed policy proposals targeting credit, liquidity and funding risks, as well as the risk of miss - pricing loans. in hungary and austria problems related to foreign exchange lending have become acute due to the appreciation of the swiss

the statement accompanying last month's policy decision, the fomc again indicated that its predominant policy concern is the risk that inflation will fail to ease as expected and that it is prepared to take action to address inflation risks if developments warrant. let me now discuss the economic outlook in a little more detail, beginning with developments in the real economy and then turning to inflation. i will conclude with some brief comments on monetary policy. consumer spending continues to be the mainstay of the current economic expansion. personal consumption expenditures, which account for more than two - thirds of aggregate demand, increased at an annual rate of around 3 - 1 / 2 percent in real terms during the second half of last year, broadly matching the brisk pace of the previous three years. consumer outlays were supported by strong gains in personal income, reflecting both the ongoing increases in payroll employment and a pickup in the growth of real wages. real hourly compensation – as measured by compensation per hour in the nonfarm business sector deflated by the personal consumption expenditures price index – rose at an annual rate of around 3 percent in the latter half of 2006. the resilience of consumer spending is all the more striking given the backdrop of the substantial correction in the housing market that became increasingly evident during the spring and summer of last year. by the middle of 2006, monthly sales of new and existing homes were about 15 percent lower than a year earlier, and the previously rapid rate of house - price appreciation had slowed markedly. the fall in housing demand in turn prompted a sharp slowing in the pace of construction of new homes. even so, the backlog of unsold homes rose from about four - and - a - half months'supply in 2005 to nearly seven months'supply by the third quarter of last year. single - family housing starts have dropped more than 30 percent since the beginning of last year, and employment growth in the construction sector has slowed substantially. some tentative signs of stabilization have recently appeared in the housing market : new and existing home sales have flattened out in recent months, mortgage applications have picked up, and some surveys find that homebuyers'sentiment has improved. however, even if housing demand falls no further, weakness in residential investment is likely to continue to weigh on economic growth over the next few quarters as homebuilders seek to reduce their inventories of unsold homes to morecomfortable levels. despite the ongoing adjustments in the housing sector, overall economic prospects for households remain good.