U.S. economic growth will remain moderate

Despite solid growth the past three years, America's economy will be subdued through 2008, say University of Michigan economists.

Moderate job gains, rising interest rates and the continuing slump in housing starts and vehicle sales will account for a somewhat restrained economy over the next two years, they say.

"The economy will expand in 2007 and 2008, but at a pace well below the 3.2 percent increase in real GDP growth of this year and last year," said Saul Hymans, U-M professor emeritus of economics. "The expansion of the past couple of years has been accompanied by healthy job gains that have brought the unemployment rate down to an expected average of 4.6 percent this year. Though job gains will shrink from their 2005-06 pace, they will remain strong enough to keep the unemployment rate in the same range."

In their annual forecast of the U.S. economy, Hymans and colleagues Joan Crary and Janet Wolfe predict employment growth of 1.5 million jobs in 2007 and 1.2 million jobs in 2008, down from this year's 1.9 million job gains and last year's 2 million. Even so, unemployment is expected to remain steady next year and tick upward to 4.7 percent in 2008.

National economic output (as measured by real Gross Domestic Product) is predicted to grow by 2.4 percent in 2007 and 2.5 percent the following year.

According to the forecast, long-term interest rates are projected to continue their gradual upward climb, even as the Federal Reserve keeps short-term rates about where they are now. The 30-year conventional mortgage rate will increase from last year's average of 5.9 percent to 6.5 percent this year, 6.6 percent next year and 7 percent in 2008.

In addition, the rate for three-month Treasury bills is expected to jump from last year's 3.1 percent to 4.7 percent this year, 4.8 percent next year and 5 percent the following year. The 10-year Treasury bond rate, which was 4.3 percent last year, will rise to 4.8 percent this year, 5.2 percent in 2007 and 5.6 percent in 2008.

Inflation, however, will be held in check over the next two years, the forecast shows. The all-items Consumer Price Index will move down from this year's 3.3 percent to 2 percent in 2007, before creeping up to 2.4 percent the year after.

With inflation expected to be contained, Hymans and colleagues believe the Federal Reserve Board will retain its "wait-and-see" approach that it has had since it last raised the federal funds rate last June.

"We do not expect inflationary outcomes that would cause the Fed to tighten monetary policy any further in the near term," Hymans said. "Indeed, the monetary policy consistent with our overall economic forecast is no significant changes, either up or down, in the federal funds rate for about another year-and-a-half."

Overall, Hymans and colleagues say that the outlook for economic growth seems to begin with what happens to the residential and vehicle sectors early next year.

"The housing market retreat remains orderly over the next two years, with prices flat in 2007 and housing activity bottoming out in early 2008," Hymans said. "Although home-building is in a slump, there's evidence that its rate of decline might be leveling off. Further, vehicle demand has weakened and the domestic producers are still trying to align production and sales."

Private housing starts are expected to fall from last year's 2.07 million units—the most since 1972—to 1.85 million this year, 1.61 million in 2007 and 1.57 million in 2008. Existing home sales, which set a new record at 6.17 million homes in 2005, are forecast to drop to 5.65 million this year, 5.05 million next year and 4.95 million the year after.

Sales of light vehicles are predicted to edge down from last year's 16.9 million units to 16.5 million in both this year and next and fall further to 16.4 million in 2008.

"With employment growth moderating, interest rates rising and fewer homeowners still able to take money out of home equity, sales of cars and light trucks will sit near 16-and-a-half million, but sales will begin to recover by late 2008," Hymans said.

The U-M forecast is based on the Michigan Quarterly Econometric Model of the U.S. Economy and compiled by the U-M Research Seminar in Quantitative Economics.

Source: University of Michigan

Related stories:

Chinese don't wait for Apple launch to get iPhone
In scenes reminiscent of a generation ago, Chinese are tapping friends and relatives travelling abroad to bring back electronic devices that are unavailable in China. The irony is the object they desire is made in China and the US company responsible for the scarcity is proud of its free-thinking image -- Apple Computers.
Best way to treat malaria: Avoid using same drug for everyone, scientists say
(PhysOrg.com) -- A team of scientists employing a sophisticated computer model pioneered at Princeton University and Resources for the Future has found that many governments worldwide are recommending the wrong kind of malaria treatment.
Creating lung cancer risk models for specific populations refines prediction
Lung cancer risk prediction models are enhanced by taking into account risk factors by race and by measuring DNA repair capacity, according to research teams led by epidemiologists at The University of Texas M. D. Anderson Cancer Center in two complementary papers appearing in the September issue of Cancer Prevention Research.
Wireless technologies used today based on decades of work at Virginia Tech
Technologies used today by companies, such as Direct TV, Iridium Satellite, Bluetooth, and Globalstar, are based on satellite communications efforts started at Virginia Tech four decades ago in its Bradley Department of Electrical and Computer Engineering (ECE).
Report: US drug use shows little change in 2007
(AP) -- Cocaine and methamphetamine use among young adults declined significantly last year as supplies dried up, leading to higher prices and reduced purity, the government reports. Overall use of illicit drugs showed little change.
Heart attack patients who stop statin risk death, say researchers
Patients discontinuing statin medication following an acute myocardial infarction (AMI) increase their risk of dying over the next year, say researchers at McGill University and the McGill University Health Centre (MUHC). Their study was published in a recent issue of the European Heart Journal.
Dell unveils new PCs targeting emerging markets
(AP) -- Dell Inc. unveiled four low-cost computer models for China, India and other emerging economies Wednesday in a new bid to tap the potential of high-growth markets outside the United States.
Number of uninsured drops; Poverty holds steady
(AP) -- The Census Bureau reports that the number of people lacking health insurance dropped by more than 1 million in 2007, the first annual decline since the Bush administration took office.

News discussion:

General Science news