U.S. economy slows slightly: will Montanans even notice?

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There is a little chill in the air for the U.S. economy. GDP growth should average just 2 percent from mid-2006 to mid-2007 compared to 3 percent to 4 percent from 2004 to 2006. The two causes of the slowdown are: (1) a plummeting housing market and (2) a more cautious

Top 10 Economic Predictions for 2007 (Courtesy of Global Insight Inc.)

1. Sluggish growth for the U.S. economy. The American economy will grow only 2.2 percent during 2007.

2. Eurozone and Japan to slow (again). Eurozone to grow 2 percent in 2007, down from 2.6 percent in 2006. Japan to decelerate from 2.7 percent to 1.8 percent.

3. Once again, China and India will be star performers. China's growth will slow(!) to 9.5 percent. India continues at about 8 percent.

4. Oil prices to remain in $60-65 range for the next three to four years and then gradually ease. The longer term price relief will come as high prices encourage new supplies of both conventional and nonconventional fuels.

5. Core inflation will ease. The record high oil prices have had very little impact on core inflation. Slower increases in housing costs will ease overall upward pressure on prices.

6. The Federal Reserve will cut rates as other central banks tighten rates. Slower GDP growth and fewer price pressures will lead the Fed to cut federal funds rates back to 4.5 percent. But the European Central Bank, the Bank of Japan, and the People's Bank of China will raise rates.

7. Housing will keep dampening U.S. growth and could become a threat elsewhere. In a weak-growth environment, strong home price appreciation is unlikely to be sustained anywhere. There is already a housing crunch in the United States and booming markets in Ireland, U.K., Spain, and Australia may be heading for a cliff.

8. Current account imbalance will ease a bit. A combination of (1) weaker domestic demand, (2) stronger growth elsewhere in the world, and (3) booming U.S. exports are finally bringing about the long-desired correction in global imbalances.

9. Continued downward pressure on the dollar. With growth

slowing and interest rate cuts expected, the forces on the dollar are uniformly downward.

10. No recession without all (or most) of the following: higher oil prices, higher inflation, and higher interest rates. Most likely recession scenario: deeper housing recession and higher inflation and interest rates (with a disruption in oil supplies) would probably push U.S. and world economies into a recession.

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Paul E. Polzin is director of The University of Montana Bureau of Business and Economic Research.

Table 1
Economic Trends for the U.S. Economy, 2000-2010
Actual and Projected as of December 2006

                                             Actual

                              2001    2002    2003    2004    2005

Real GDP (chained $),
percent change                 0.8     1.6     2.5     3.9     3.2

Inflation (CPI-U),
percent change                 2.8     1.6     2.3     2.7     3.4

Interest Rates
  90-day T -bills, percent     3.4     1.6     1.0     1.4     3.1
  Mortgage rates
  (30 years), percent          7.0     6.5     5.8     5.8     5.9

Housing starts, millions      1.60    1.71    1.85    1.95    2.10

Unemployment rate, percent     4.7     5.8     6.0     5.5     5.1

Oil, West Texas              25.96   26.11   31.12   41.47   56.57
Intermediate ($/barrel)

                                          Projected

                              2006    2007    2008    2009    2010

Real GDP (chained $),
percent change                 3.3     2.2     3.2     3.4     3.3

Inflation (CPI-U),
percent change                 3.2     1.7     2.0     1.8     1.8

Interest Rates
  90-day T -bills, percent     4.7     4.7     4.4     4.5     4.6
  Mortgage rates
  (30 years), percent          6.4     6.1     6.4     6.9     7.0

Housing starts, millions      1.80    1.50    1.60    1.70    1.80

Unemployment rate, percent     4.6     4.9     5.0     4.7     4.4

Oil, West Texas              65.97   64.44   64.75   63.88   63.40
Intermediate ($/barrel)

Source: Global Insight Inc.