New NAM Economic Forecast Shows Economy Stuck in Low Gear For a Little While Longer

By May 15, 2007Economy

Business is UpThe just-released May 2007 NAM Economic Forecast shows that the economy will remain stuck in low gear in the short term, growing by 2.3 percent in the second quarter. Then, the economy will accelerate gradually in the second half, growing by 2.7 percent in the third quarter and then 3.2 percent in the fourth quarter. For 2007 overall, the economy is forecast to grow by 2.4 percent on a Q4/Q4 basis. This is the slowest pace in five years.

Continued modest economic growth will be driven by three factors.
(1) a continued downturn in housing, which will also curtail the growth in consumer spending
(2) a pullback in inventory investment by businesses and,
(3) sluggish business investment, particularly industrial equipment.

These negative factors will be offset by
(1) positive consumer spending (though hampered by rising energy costs and the housing downturn, real wages have rebounded in the past 6 months),
(2) continued growth in business structures and,
(3) an improving trade picture.

Manufacturing output will grow by 2.2 percent this year. While this is the sixth consecutive year of positive growth, it is nonetheless measurably slower that the 3.9 percent average pace during the 2004-2006 period. The ongoing downturn in housing, slower consumer spending, and a temporary pause in transportation and industrial equipment investment will together dampen demand for manufacturing products. This will be offset, to a degree, by favorable trade winds from a more-competitive value of the dollar and solid economic growth abroad, which together will create a favorable environment for exports.

Job losses will continue in construction (-140,000) and manufacturing (-100,000) in 2007. The decline in manufacturing employment will be concentrated in transportation products as well as the sectors closely connected with housing.

Outside of manufacturing and construction, a slower-growing economy will create 1.1 million new jobs this year, half the 2.2 million jobs created last year. As a result the unemployment rate will climb to 4.9 percent by the end of the year.

Nonfarm business productivity will accelerate from 1.4 percent growth last year to 2.1 percent this year. This is equal to the 2005 pace but slower than the 2.6 percent average growth attained so far during this expansion. At the same time, hourly compensation is expected to increase by 4 percent this year. This points to a modest 1.8 percent rise in unit labor costs for 2007, which is lower than the 3.4 percent surge in 2006 but slightly higher that than the 1.5 percent rise that has taken place since 2001.

At present, monetary policy is marginally restrictive. With core-consumer inflation expected to rise by 2.5 percent this year, and with economic growth expected to pickup in the second half of the year, the Federal Reserve will likely stay on the sidelines and keep current interest rates in place for the remainder of 2007.