WASHINGTON—President Bush travels to the Chicago Board of Trade on Friday, where he'll deliver remarks that amount to a pep rally for the vibrant U.S. economy.
Mainstream economists share Bush's upbeat view, at least for the short term, but some are skittish about the outlook for later this year and beyond. A survey of 56 economists published this week by The Wall Street Journal yielded a consensus forecast of 3.5 percent annual growth for the first half of 2006, slipping to 3.1 percent for the second half.
"The economy is in very good shape and people don't realize it," said Sherry Cooper, chief economist for investment firm BMO Nesbitt Burns in Toronto. "We really do have low inflation and low unemployment, and the economy has been growing at a rate of 3 percent or better since the last recession."
The economy is in its fifth year of expansion since the last recession ended in November 2001. Unemployment remains historically low and consumers are shrugging off a slowing housing market and high-priced fuels.
Yet some prominent voices are dour, warning that recession could rear its ugly head by early 2007.
Wall Street investment giant Merrill Lynch sees signs that the current five-year business cycle may be running out of steam. It noted that in late December, interest rates on two-year bonds surpassed rates on 10-year bonds. This is known as an inverted yield curve and historically has been a reliable indicator of coming recession.
"The odds of recession hinge not on just if the curve inverts, but by how much and for how long," said David Rosenberg, Merrill Lynch's chief North American economist.
He put chances of recession this year at less than 20 percent, but higher for 2007. And he projected sluggish growth of only 2.5 percent this year. That's below the rosy consensus forecast that sees strong growth for 2006, albeit weaker than 2005. The U.S. economy grew by 4.3 percent in the third quarter and probably closed 2005 above 3.7 percent for the year.
"We're now in the `middle innings' of the current economic expansion, and the next economic recession is not yet in sight," David Seiders, chief economist for the National Association of Home Builders, wrote Jan. 4.
Business spending, after several slack years, is expected to drive the expansion, taking the reins from consumers.
"Basically, the American consumer has contributed significantly to the business-cycle expansion. But it's time for the leadership, in terms of growth, to shift, and there are signs of that happening," said Brian Bethune, a U.S. economist for Global Insight, an economic forecaster in Waltham, Mass.
Flush with cash, corporations are buying back stocks, paying dividends and acquiring other companies. They're also expected to spend more this year on capital goods and hiring.
Ken Simonson, chief economist for the Associated General Contractors of America, which represents the building trades, feels the shift. Nonresidential construction is picking up even as homebuilding slows a bit, he said. He expects spending by state and local governments to help, too.
"I think revenues keep coming in higher than the budget officers had expected, and as a result they will be restoring some of the spending that they've had to defer on things like public structures, parks and conservation, water and sewer construction," he said. "The other sources of state and local spending, property taxes, are also flowing in richly."
That's not to say no risks loom.
Gasoline prices are below autumn peaks, but crude oil prices, the benchmark for pump prices, remain high and volatile. And winter home-heating costs are soaring.
Anecdotal evidence suggests that home prices have fallen as much as 15 percent in some of the nation's hottest markets. And the inventory of unsold homes has reached new highs, according to InvestTech Research, which tracks home sales nationwide.
"And the value of these unsold homes in the U.S. now exceeds (a) half-trillion dollars—up 33 percent from a year ago!" InvestTech publisher James Stack wrote Dec. 23.
Whether housing prices slow their gains or turn south depends greatly on whether the Federal Reserve pushes interest rates too high. This month it signaled that its credit-tightening cycle is nearing an end after 13 consecutive quarter-point rate increases.
Still, it's expected to announce a 14th straight hike on Jan. 31. The Fed's rate actions help determine mortgage and consumer loan rates. Previous recessions have been blamed on the Fed overdoing rate hikes in an effort to tame inflation. Rate increases slow borrowing, and thus the economy.
In addition, America remains dependent on the kindness of others. Foreign central banks, especially in China, Japan and the Middle East, have been buying up U.S. government debt.
Should their appetite for Treasury notes sour, bank-lending rates could rise, driving up mortgage rates. That could prove devastating to overextended homeowners who took out adjustable-rate mortgages and interest-only loans.
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(c) 2006, Knight Ridder/Tribune Information Services.
ARCHIVE GRAPHICS on KRT Direct (from KRT Graphics, 202-383-6064): 20051114 CRUNCH, 20051215 Interest rates, 20051202 Unemployment.
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