US Economists Unveil 2007 Forecasts

04 January 2007

NEW YORK: US economists are looking toward a brighter 2007, according to a survey by the Wall Street Journal. Most of the sixty experts asked to crystal ballgaze expect a good year, but not a great one.

They believe the economy should shake off the housing slump to allow a fall in interest rates and pave the way for modest expansion.

They predict that inflation-adjusted GDP will grow at an annualized rate of 2.3% in the first half of 2007 and 2.8% in the second half, a rise from a sluggish 2% in the third quarter of 2006, but still far below the robust annual growth rates of 3.2% for 2005 and 4.1% for early 2006.

Comments Bruce Kasman, head of economic research at JP Morgan Chase: "As long as you don't think the labor market is going to collapse or financial conditions are going to change, then you're starting to have the conditions for better growth down the road."

The service sector, led by technology firms such as Google plus investment banks and catering chains, is without doubt strengthening. It added 1.1 million jobs between May and November 2006.

Housing and manufacturing, however, have not fared well. Builders have slashed prices and production as they attempt to get rid of unsold homes. Housing-related industries shed 145,000 jobs from May through November.

Six in ten of the economists surveyed thought the worst of the housing downturn's impact on the broader economy had passed. But they also saw a deeper housing slump as the biggest risk looming over 2007.

The panel believed the strength in services will help keep employment relatively healthy with around 100,000 new jobs a month during 2007, which should slowly lift wages without feeding inflation.

But there are pessimistic prophets. Ian Shepherdson, chief US economist at consulting firm High Frequency Economics, puts the odds of a recession at one in two. He expects real GDP to grow at an annual rate of 0.5% in the first half of 2007 and 2.25% in the second half.

Shepherdson says: "It's going to be worse than the consensus expects. My guess is that we'll probably avoid a recession, but by the skin of our teeth."

Data sourced from Wall Street Journal Online; additional content by WARC staff