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The GDP in fourth quarter of 2006
grew at an unexpectedly high 3.5 percent annualized growth rate. Most
analysts thought the economy would slow during fourth quarter 2006 to the 1
to 2 percent range. Some forecasters even thought GDP might actually
contract due to the weakness in the real estate market. Needless to say,
their forecast underestimated the resiliency of the economy. The consensus
view for 2007 is that the economy will probably continue to expand, albeit
at a slower pace than the 3.4 percent registered for the full year of 2006.
Moreover, on January 31st
the Federal Reserve decided to hold the key federal funds rate at 5.25
percent. In their assessment of economic conditions, the Federal Reserve
felt the economy was on firm ground at the start of 2007. Moreover, the
important housing market is showing signs of stabilizing and that
inflationary pressures in the economy seem to be moderating. The decline in
real estate and energy prices has helped clam inflationary pressures. While
the Federal Reserve has not completely dismissed the possibility of
escalating inflation, it appears to be leaning toward the idea that the
economy is now on a sustainable growth path. This may mean the Federal
Reserve has concluded its campaign to raise interest rates and of tightening
of credit conditions.
Let’s turn our attention to some of
the major economic indicators for a more in depth look at the situation.
The U.S. Department of Labor reports that employment has been trending
solidly upwards in both the household and payroll surveys. Payroll
employment for the last several years has been trending upwards at about a 2
percent annual rate. Relatedly, personal income has been expanding at
around a 6 percent rate nationally. The employment and personal income
numbers bode well for a future expansion of the national and state
economies. An area of concern, however, has been the weak employment
numbers in manufacturing. Approximately 3.5 million manufacturing jobs have
been lost since 2000. Overseas competition and gains in manufacturing
productivity have played a major role in this decline.
Another positive indicator for the
economy has been the rise in the consumer confidence index. The index has
been steadily rising since 2003 and has recently moved up sharply. Given
that 70 percent of all economic activity comes from household expenditures,
it is imperative that households have a positive view of the economy. And,
as noted earlier, inflationary pressures have abated. The consumer price
index is now rising at approximately a 2 percent annual rate. This is
considered to be a rather benign rate of increase and should help to
solidify the nation’s growth prospects.
Closer to home, the Wisconsin
Department of Revenue is forecasting that the state should experience
employment growth of about 0.6 percent during 2007, compared to the 1.1
percent forecast for the nation. Moreover, disposable personal income is
expected to grow at around 4.7 percent. Meanwhile the nation is expected to
see a 5.4 percent growth rate in personal income during 2007. Thus,
Wisconsin will see its economy expanding in 2007, but it will trail the
overall U.S. averages. Wisconsin’s reliance on manufacturing and its less
developed high value services sector (typically found in large metropolitan
areas) helps to explain the differences in growth rates. Lastly, Table 1 in
the report gives the year over changes for GDP, industrial production, three
month U.S. Treasury bill rates, and the consumer price index. For the most
part, these variables reflect a healthy economy.
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