U.S. economy: More jobs, higher interest rates
The U.S. economy will add nearly four million new jobs through 2007, say U-M economists.
"The economic expansion remains healthy over the next two years," says Saul Hymans, emeritus professor of economics. "The economy will add a substantial number of jobs and unemployment will edge down."
In their annual forecast of the U.S. economy, Hymans and colleagues Joan Crary and Janet Wolfe predict 3.4 percent growth in national economic output (as measured by real Gross Domestic Product) next year and 2.8 percent in 2007down somewhat from last year's 4.2 percent growth rate and this year's 3.6 percent mark, but still solid.
The economists say 2.1 million jobs will be added nationwide in 2006 and another 1.8 million jobs will be added in 2007. Unemployment will fall from 5.1 percent this year to 4.8 percent in each of the next two years.
While the economy will expand and more jobs will be available in the next two years, they say interest rates and inflation also will rise.
The conventional mortgage rate is predicted to rise from 5.9 percent this year to 7 percent in 2006 and to 7.4 percent in 2007. The rate for three-month Treasury bills will increase from 3.2 percent in 2005 to 4.4 percent next year and to 4.7 percent in 2007, while the 10-year Treasury bond rate climbs from 4.4 percent this year to 5.5 percent in 2006 and to 5.9 percent the year after.
Core inflation (excluding food and energy prices), which was 1.8 percent last year and is 2.1 percent this year, will be 2 percent in 2006 and 2.5 percent in 2007, according to the forecast.
"The fact that core inflation has come up to about 2 percent suggests that the Fed was right when it began to raise short-term interest rates a year-and-a-half ago," Hymans says. "The monetary policy of 2002-2004 was simply too expansionary to keep in place."
Hymans and colleagues expect the Fed to take measures to keep inflation in check by raising the federal funds rate from its current mark of 4 percent.
"Our forecast suggests that economic conditions will warrant further interest rate increases next summer and we assume that the funds rate will be pushed to 5 percent at that time, where we expect it to remain in 2007," Hymans says.
The forecast, which is based on the Michigan Quarterly Econometric Model of the U.S. Economy and compiled by the U-M Research Seminar in Quantitative Economics (RSQE), also predicts that:
• Private housing starts will slip from a 33-year high of 2.06 million units this year to 1.92 million in 2006 and to 1.79 million the year after;
• Existing home sales will fall from 6.19 million units this year to 5.77 million next year and to 5.48 million in 2007;
• Sales of light vehicles, which have held steady at 16.9 million units in both 2004 and 2005, will edge up to 17 million next year and to 17.1 million the following year;
• Real disposable income, up just 1.7 percent in 2005, will post hefty increases of 4.6 percent in 2006 and 4.2 percent in 2007;
• Consumer spending growth will remain fairly steady at 3.5 percent next year (the same as in 2005) and 3.8 percent the year after.
For more information about RSQE, see www.econ.lsa.umich.edu/econ.