In the near term, forecasters see the national economy treading down a path of modest economic growth. This view is held in spite of the very robust amount of GDP growth that took place during the first three months of the year. At the time of this report there appears to be no extreme imbalances in the economy that might trigger a recession. 

     However, probably a greater risk than a recession is the threat that the economy might overheat. In other words, inflation could be kindled by an excessive demand for goods and services. The increase in demand would lead to higher production which will result in a bidding up of wages. Given that labor markets throughout the nation are very tight, wage pressure would surely mount. Productivity gains would not be able to offset the wage increase. It would be only a matter of time then before the higher labor costs are translated into a general rise in the price level. 

     The aforementioned scenario, however, ignores the fact that the Federal Reserve appears to be fervently committed to raising interest rates at the first hint of an acceleration in the inflation rate. Further, besides the obvious economic impact on borrowing costs, higher interest rates will also cause the dollar to appreciate in the foreign currency markets. This would have the impact of making domestically produced goods more expensive for people living in other countries and thus reduce domestic production and price pressures. Additionally, domestic and international competition, make price increases incredibly hard to do at this point in time. This means that higher wages would eat into profit margins rather than translating into higher product prices. Thus the threat of inflation may be overstated. The irony of all of this is that if the Federal Reserve miscalculates and tightens too much in response to an alleged inflationary situation, a recession might result. 

     The economic outlook for Wisconsin is predicted on the assumption that labor shortages will cause employment growth to trail that of the nation. After nearly a decade of almost uninterrupted growth many Wisconsin firms are near capacity and unless some unforeseen immigration of workers takes place, employers will find it increasingly more difficult to expand. Another potential drag on the Wisconsin economy which suggests that employment growth will lag the U.S. in the future is the strengthening of the dollar. Wisconsin is still highly dependent on capital goods production and to the extent these firms find it more difficult to compete with foreign firms the slower will be the economic growth of the state. The state economy will most likely continue to grow in the year ahead but at a slower rate than the country as a whole. 

     The success of the Wisconsin economy over the past decade has created this situation of tight labor markets with firths operating at or near capacity. What were some of the major factors causing Wisconsin to become such a success story? One reason is that to survive, firms in Wisconsin had to and did become more efficient in the face of stiff International competition. Further, lean economic times in the earlier 1980s reduced wage costs relative to the nation and favorable developments with regard to energy prices helped an energy‑importing state like Wisconsin to become more competitive. A growing Wisconsin exporting sector has been helped during much of the last decade by the depreciation of the dollar. However, most analysts see the increased productivity of our business and workforce as even more important to our exporting success. Therefore, an appreciating dollar may slow economic growth but not to the extent it once would have in Wisconsin.