According to FTR Associates, factors likely to affect the overall 2007 economy are currently giving a mixed picture. Weighing on growth is the declining housing market and cuts in production by domestic auto producers. These industries are now laying off workers and are responsible for the lackluster employment gains the economy has seen recently. So far, job gains outside of housing and manufacturing remain steadfast, but this bears close scrutiny.
“We think that housing will find a floor and that the economy will expand at slightly below its long-term rate of growth at about 3% in 2007,” said Steve Graham, vice-president of market analysis for FTR.
Growth will be fueled by business investment in equipment and exports. Companies still have solid balance sheets, and a fairly tight labor market means a need to invest in productivity-enhancing equipment continues.
“We should see healthy exports, aided by the falling dollar,“ said Graham. “The global economy is still experiencing strong broadly based growth. However, there is a significant danger that secondary effects from housing and the slowing auto sector could spill over to the wider economy. If businesses in other industries respond to the weakening activity by curtailing their own investment and hiring plans, the economy could devolve into recession.”
FTR now believes that the chance of recession — most likely in the first half of 2007 — is one in three, uncomfortably high, but not certain. Even if the nation avoids recession, growth rates will seem weak compared with past years, and there may be a bump or two in the road in 2007.