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'06 Closes, '07 Opens on Upbeat Economic Notes

Latest News > Industry News

The old year ushered in the new with a wide range of economic indicators showing fair weather and a chorus of economists forecasting more of the same throughout 2007.

Macroeconomic indicators forecast sustained economic output growth through the end of 2007, according to the December Livingstone Survey of the Federal Reserve Bank of Philadelphia. The survey summarizes the forecasts of 40 economists from industry, government, banking and academia. Started in 1946, it is the oldest continuous survey of economists' expectations.

Real Gross Domestic Product (GDP) will rise at an annual rate of 2.1% in the second half of 2006, according to the survey. The growth rate of economic output will increase to 2.8% in the first half of 2007 and accelerate further, to 3.1% in the second half, the forecast states. These forecasts are somewhat lower than in the June survey, however, suggesting that output growth might not be as strong, particularly in the last half of 2006.

The unemployment rate is expected to rise from 4.5% in December 2006 to 4.8% in June 2007 and increase slightly to 4.9% by the end of 2007. These forecasts are somewhat lower than in the previous survey, suggesting a small overall improvement in employment.

Inflation is expected to slow in 2007, according to forecasters. The Consumer Price Index (CPI) will average 3.3% in 2006, then fall to 2.1% in 2007, rising slightly to 2.3% in 2008.

Short-term interest rates will hold steady; long-term rates will rise, the survey finds. Short-term rates (on 3-month Treasury bills) will stay at 5.0%. Long-term rates (on 10-year Treasury bonds) are projected at 4.7% for December, 2006, rising to 4.9% in June and to 5.1% at the end of 2007. Forecasters expect that rate to hold steady through 2008.

Architectural billings point to more growth. The Architecture Billing Index (ABI) of the American Institute of Architects (AIA) jumped to its second-highest level of the year in November, as the commercial/industrial sector recorded its best mark in a decade, according to the AIA Economics and Market Research Group. The ABI is considered a 9 to 12-month leading indicator of nonresidential construction activity.

The ABI November rating was 57.5, up sharply from October's 51.1. The gains followed several months of "very modest growth," according to the research group. Any score over 50 indicates an increase in billings.

Other indicators of construction activity, such as the Housing Affordability Index (National Assn. of Realtors), mortgage applications, manufacturing employment, office and manufacturing vacancy rates, were mixed but positive overall.

Lower copper prices are headed still lower. Copper prices in December slid quickly to an 8-month low and analysts forecast the price would decline further in 2007, according to Reuters. Copper for March 2007 delivery hit $2.86 a pound, down substantially from a record $4.04 a pound in May, The Motley reported. Analysts said prices were driven lower by a sharp drop in demand from the U.S. housing and automotive industries, both heavy users of copper, and a corresponding growth in copper inventories. Some analysts predict that copper may hit $2.00 a pound this year.

Even troubled U.S. new home sales ended the year on a positive note. Sales rose more than forecast in November, and October figures were revised upward, by the U.S. Department of Commerce. The rate on 30-year fixed mortgages remained under 6.2% in November, compared with the year's high of 6.8% in July. New home inventories fell to the lowest level since May, as builders offered more buyer incentive. All these factors suggest that new home sales may have reached the worst of their slump and that the slowdown may put less drag on the economy than had been feared.