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US Economists Divided on Outlook For 2007

The U.S. economy is beginning to show the impact of the significant rises in short-term interest rates that over the past two years have made the cost of credit considerably more expensive.

Jim Glassman, an economist at JP Morgan in New York says the economy is stronger than some experts suggest. He points to the latest employment report of November 3 that shows stronger than expected job growth and an historically low level of unemployment. "The slowdown we've had in the third quarter is very narrowly focused on home builders and maybe the auto industry. But what we're learning is that beyond those struggling industries things are doing a little better. With the unemployment rate coming down to four point four percent, is what's got everybody's attention," he said.

But others look at the slumping auto and housing industries and draw quite a different conclusion. Jim Rogers, a successful money manager, author and specialist on commodities, says the economy is doing less well than the two percent third quarter growth rate would suggest. "You put all these factors together and I suspect the US economy is in recession right now. Certainly some parts of the economy are in recession-home building, automobiles, things like that," he said at a forum in South Korea November 2.

The Federal Reserve, the American central bank, began raising short-term interest rates in 2004 because it wanted to bring economic growth down from what it regarded as an unsustainable three and a half to four percent pace. In addition, it feared that dramatically higher oil prices could unleash a wave of inflation that would worsen if the economy was growing too fast.

Susan Bies, one of the six governors of the Federal Reserve Board, told students at Iowa's Drake University that with new home construction down 25 percent, there is probably still more weakness ahead for the housing industry. But, she says, the worst of the housing decline may be over. "For while short-term interest rates have moved up four and a quarter points, people have shifted from variable rate mortgages into more fixed rate mortgages. And the long-term interest rates have moved up less than half a point. So they're still at historically low levels," she said.

Oil prices have similarly had a big impact on economic activity. Prices quadrupled over a four-year period to record highs but have in the past four months come down by 25 percent. New York energy trader Ed Silliere tells Bloomberg News that prices are likely to decline further. "My objective for oil prices hasn't changed. I think by the spring (in the northern hemisphere) we could be below $50 and pushing towards $40," he said.

Oil prices earlier this year reached a high of nearly $80 per barrel.

Another uncertainty is the high level of consumer debt. Most Americans have outstanding balances on their credit cards and those interest charges have risen drastically. However, thus far consumer confidence is holding up and there are few signs that consumers are cutting back.

Economists are divided about the outlook with one panel of forecasters evenly split between those predicting continued growth and those predicting recession in 2007.