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Outlook for the U.S. Economy

Prof. Peter Morici - 9/6/2006

Each month, I respond to the Bloomberg and Reuters surveys of Wall Street and corporate economists for the medium-term economic outlook. Here is what I submitted to Bloomberg this week, along with some comments on the risks of recession published by the Globe and Mail and Merrill Lynch Canada.

In a nutshell, economic growth should reignite as we move through the holiday season and into 2007 if the Fed resists pressures to push up interest rates too much and the housing market adjustment does not cause an abrupt increase in consumer savings. The prospects for either seem low at this time.

Growth accelerating from 3.1 to 3.6 percent over the next four quarters seems likely; however, this will not be enough to lower unemployment. Productivity growth will remain strong but the economy and labor markets will continue to under perform their potential thanks to large trade deficits and inappropriate exchange rate and energy policies.

Econometric models present as linear the relationships between GDP, employment and other measures of macroeconomic performance, on the one hand, and the principal levers of policy--interest rates, taxes and spending, and exchange rates--on the other. In reality, movements in key policy levers can motivate dramatic shifts in consumer and investment behavior at points of inflection in the business cycle or critical junctions in asset markets.

The outlook for the U.S. economy and stock market is quite good. A policy jolt or some other event that panics equity markets or consumers could thrust the economy into a downward spiral.