A little ‘slowth’ for the U.S. economy


What’s ahead for the U.S. economy in 2007? Not recession, probably. Not booming growth, either.
Something in-between. Call it “slowth.”
We’re in the fifth year of an expansion that started at the end of 2001. Gross domestic product grew smartly over the past year, by 3.5 percent. We’re producing more goods and services. The unemployment rate edged downward to 4.8 percent. More people are employed.
But prices rose too, faster than they have in years.
Blame it on oil. The inflation rate over the past year was 4.2 percent. It hasn’t been that high since 1991. Oil prices are the reason.
So we look at the “core” rate of inflation, without energy and food prices, to get a better picture of what’s happening.
Core inflation was 2.7 percent over the past year. That’s up, too, from 2.1 percent a year ago.
Higher prices on imported oil mean Americans have less to spend on other goods and services. Businesses don’t increase production and employment as much. Higher oil prices also raise costs, for plastics, fertilizers, electric power, transportation.
Rising core inflation shows that these costs are being passed on in higher prices. Businesses that can’t pass along their cost increases find their operations less profitable. They don’t expand as much.
If oil prices don’t come down, we’ll get slowth.
What’s Fed doing? Concern about inflation caused the Federal Reserve to raise interest rates.
Fed policymakers increased short-term interest rates by a quarter point at 17 straight meetings up to June 2006. They finally stopped in August. For a year-and-a-half, though, rates on long-term Treasury bonds and home mortgages didn’t rise. Chairman Greenspan called it a conundrum.
Now the conundrum is over. Long-term rates are rising. This makes borrowing more costly and will reduce the growth of spending on business equipment and construction. That should bring inflation down, but it means slowth.
Housing boom behind us. The housing boom is over. Higher interest rates helped end it. Building permits peaked first, in July 2005, and have fallen 17 percent over the past year. Then, home sales began to drop last September, also down 17 percent since then.
Finally, in January, new housing starts peaked. They’re now down 18 percent. As of March – the most recent figures at this writing – house prices haven’t started to drop. They’re rising more slowly, though.
So what? This matters for the economy because investment in housing has been contributing a lot to recent growth. Think of all the construction employees hired and wood, bricks, concrete, appliances and furniture that people have purchased because of the construction boom.
More than that, the appreciation of home prices made people wealthier. Home equity loans turn housing wealth into consumer spending. If house prices don’t appreciate, consumer spending will grow more slowly.
And that contributes to slowth.
This doesn’t seem quite fair to those of us in the Midwest. We didn’t have a house-price boom. We’ve got too much land and too little zoning for house prices to skyrocket the way they did in California and the Northeast. Yet, if those folks stop buying, they’ll buy less of what we produce, and we’ll get some slowth.
Manufacturing woes. The 2001 recession never ended for many of the region’s factory workers. Manufacturing employment usually grows during expansions. Not this time.
There are 3 million fewer jobs in manufacturing in the United States today than there were at the end of the 1990s and 100,000 fewer in Indiana.
Globalization is changing where manufacturing is done, and new technology means fewer people are needed to do it. Slowth in manufacturing employment would be an improvement.
The R-word. What about recession? Will output actually decline? The leading indicators put the odds of recession at about one in five.
The economy will be weaker in 2007, but we’ll need one more “shock” to push us over the edge. If housing prices crash, or if oil prices spike, or if China and Japan decide to pull their money out of dollars, we could get a recession. These aren’t very likely.
Probably, GDP will grow about 2.5 percent above inflation, down a point from this past year.
Neither recession nor growth. Just slowth.
(The author is an ag economist at Purdue University.)


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