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This is the
first economic indicators report for the year 2007. Therefore, it seems
appropriate at this time that we would want to examine the future prospects
of the economy and how it may perform during the year. As a basis for my
discussion, I will employ the results of a survey conducted by the Federal
Reserve Bank of Philadelphia. The survey represents the consensus view of
49 professional forecasters.
The consensus
view is that nominal GDP is expected to grow by about 5 percent during 2007
or expand to a mind staggering $13.9 trillion. When the GDP estimate is
adjusted for inflation, our national output, or real GDP, is expected to
grow by a respectable 2.8 percent and reach $11.7 trillion. Economists
generally favor using the real GDP figure as it more accurately reflects the
actual change in the well being of the country. Thus, despite the weak 1.3
percent annualized growth in first quarter GDP, the consensus view is that
there will be no recession in 2007.
In greater
detail, real expenditures on the part of households should reach $8.4
trillion or grow by a very respectable 3.2 percent over the course of the
year. Relatedly, inflation adjusted residential construction is forecasted
to contract by 10.3 percent, falling from $582.5 billion in 2006 to $522.4
billion in 2007. The consensus forecast clearly reflects the woes facing
the domestic housing market.
A much brighter forecast is being made for nonresidential
business investment. Business investment in factories, plant, and equipment
is expected to grow by 5.6 percent in real terms over the year and will
reach $1.38 trillion in 2007 compared to $1.31 trillion in 2006, a gain of
about $70 billion. Linked to business investment is the change in finished
goods inventory. Inventories are projected to decline from $46.4 billion to
$32.9 billion or by 13.5 percent during 2007. In conclusion the consensus
forecast is that business firms will once again pick up the pace in
investments, giving the economy a healthy injection of spending. Federal,
state, and local government spending will increase by approximately 1.9 and
2.6 percent respectively, thus adding a modest shot in the arm to the
expenditures of goods and services. In real terms, the government sector of
the economy represents about $2.05 trillion of all the spending on final
goods and services, or another way of looking at it, consumes about 17.4
percent of the nation’s output of goods and services.
Due to the falling dollar and strong economic growth elsewhere in the world,
forecasters project that net exports will improve from negative $617.8
billion to negative $591.0 billion in 2007, a net increase of nearly $27
billion. In other words the gap between exports and imports should contract
by about 4.2 percent over the year.
Other important macroeconomic variables were also forecasted for year 2007.
Corporate profits will grow by approximately 8.1 percent, a very respectable
amount but lower than the double digit increases that we have become
accustomed to over the past number of years. The monthly average
unemployment rate is forecasted to rise slightly from 4.6 percent in 2006 to
4.7 percent in 2007. In addition, nonfarm payrolls will grow by 1.2 percent
during the year, rising from $135.4 million to $137.0 million. Lastly,
interest rates are forecasted to rise slightly. For example, the three
month treasury bill rate is expected to rise by .25 points to 4.98 percent
by year end; and AAA corporate bond yields are expected to climb slightly
from 5.59 percent to about 5.64 percent by year end.
Even though these forecasted amounts come from a blue chip panel of experts
in the field of economic forecasting, the estimates are subject to
substantial risks. The following threats to the forecast are well known and
include the following: the subprime lending mess and the associated rise in
bankruptcies; relatedly, the bursting of the housing bubble; energy prices
and political uncertainty in the Middle East; the rising tide of U.S.
protectionism; the fear that an emerging economy like China might overheat
and destabilize the world’s economy; and, last but not least, a Federal
Reserve System so intent and focused on fighting inflation that it fails to
provide enough liquidity to the economy and thus causes a recession. These
and other unknown threats could have a great influence upon the accuracy of
the 2007 forecast. |
