Bureau of Business Research

 

Date of this Version

7-2007

Comments

Published in Business in Nebraska, Volume 62, No. 687, July 2007. Presented by the UNL Bureau of Business Research. Used by permission.

Abstract

The U.S. economy achieved a soft landing in 2006. This was a desirable outcome. The economy needed a break from its rapid, and potentially inflationary, growth in 2004 and 2005, before taking off again. But, that new flight has been delayed. The aggregate economy has remained mired in slow growth in the first half of 2007. Pockets of the economy, such as the labor market, have been strong, but a weak housing sector has limited overall growth. Further, signs point to one or two more quarters of weaker growth, before the economy is able to take off again.

This outcome is disappointing, and has been difficult for many individuals and businesses in the construction industry, and related sectors. There was a 25% decline in the number of building permits nationwide between June 2006 and June 2007, a nearly 20% decline in housing starts. This decline had a ripple effect not only in construction but in related industries such as real estate, and segments of manufacturing and finance.

Many workers, however, have been unaffected by the decline. The overall labor market in fact has been quite strong. Total employment increased by 1.4% nationwide between June 2006 and June 2007, and the unemployment rate currently sits at 4.5%. This pattern of solid employment growth despite weak growth in gross domestic product is typical of the later stages of the businesses cycle. In many ways, it is the mirror image of the “jobless recovery” that occurred in 2002 and 2003 when the national economy pulled out of the 2001 recession. At that time, firms squeezed productivity out of the economy, expanding output rapidly without increasing employment. Expenses were cut and employees worked long hours. By now, many of these opportunities have been exhausted and firms must expand employment to increase output. Thus, there is solid employment and earnings growth even when economic growth is tepid. Nationwide, 1.2% job growth is expected for 2007. But, job growth will need to accelerate as the economy returns to trend growth in 2008 and 2009. Job growth of 1.4% is expected for 2008 and 1.7% for 2009%. Growth in real (inflationadjusted) gross domestic product will reach only 1.9% in 2007 before rising to 2.8% in 2008 and 3.1% in 2009. We see only a small chance of a recession in the next four quarters.

Given expectations that the economy will return to trend growth next year, the Federal Reserve will have little incentive to lower interest rates. But, there also will be no need to increase rates as inflationary pressures recede. The consumer price index was up 2.5% in the first half of 2007 versus 3.8% in the first half of 2006. Inflation rates should stabilize at this level. For all of 2007, we expect inflation of 2.3%. Inflation is expected at 2.5% in both 2008 and 2009.

Gasoline prices are expected to remain steady over the next few years. To be sure, prices will continue to fluctuate seasonally, spiking in the summer and declining in the spring and fall. But, a permanent decline is not expected. Unfortunately, we are currently experiencing the “new normal” price for gasoline in the summer. Commodity prices in general are expected to stay strong. In many ways this will benefit states such as Nebraska where commodity production is an important part of the economy.

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