2007 Economic Outlook
As the final quarter of 2006 draws to a conclusion, end-of-year numbers are beginning to emerge that give insight into what can be expected in terms of economic performance for 2007. Although at first it may appear that the U.S. economy in particular is headed for more challenging territory, a careful and balanced view might offer the meticulous strategist encouraging news and a plan of action.
What is clear from the end-of-year numbers is that the U.S. economy is headed for some type of slowdown. Even though some of the numbers, housing in particular, have elicited little surprise, other indicators such as manufacturing activity, durable goods and consumer spending look to be early warning signs of a weakening economy. Furthermore, even though we currently are seeing what is commonly known as an inverted yield curve, this trend has been in place since the fall of 2005. Components that go into the formation of the yield curve such as labor costs, gross domestic product and worker productivity gains indicate a number of things. For example, labor costs have been rising which can be an indicator for an overheated labor market—one in which the cost of obtaining new labor is constricted by the shortage of skilled applicants and one in which the cost of retaining labor is also pressured higher—thereby raising labor costs, with the ultimate effect upon goods and services cost appreciation. The fortuitous upshot of increased competition for labor and the subsequent higher prices that labor can command is in the area of salaries and wages. As both increase, the side effect can be seen in personal income, which itself increased in both September and October by around 0.6 percent.
Traditional worries surrounding such issues as the trade deficit and budget deficit appear to have subsided somewhat. Despite appearances the trade deficit is manageable and the budget deficit does not look to be the looming disaster it once was.