It's a "backseat year" for me...
There are years when it is fun to be out front and make
economic and financial forecasts and predictions. I did
pretty well on this score over the 2003-06 period. The
truth is that being in the forecast game is a pain in the
ass as it tends to force you to keep thinking about what
you said as events unfold. For 2007, I am slipping into
"humble" mode -- just a simple seeker of truth. So, I
take a back seat to those braver than I. The key here
for me is to make projections and forecasts when it is
easy to do so, ie. when you have a compelling case. Not
so for me as I look at next year.
I peg US economic growth potential at 2.75% on a longer
range basis. That'a low number for me, and it reflects
my expectation of slow labor force growth ahead and a
more moderate pace of productivity growth. It might not
be so easy to to hit 2.75% next year. The US may go into the
year with housing and commercial inventory overhang and a
consumer whose real wage is just beginning to recover. The
areas of positive intrigue are trade and business technology.
US exports have been sloppy in recent months but remain in
a strong uptrend, and the recovery in technology is just
now approaching levels where it might be wise for producers to
expand capacity. For now, I am content to view the outlook
conservatively.
The macro-indicators I follow to track profits growth are
deteriorating as the year comes to an end, and although
still in positive territory, are close to levels that
normally suggest a flattening of profit margins and the
potential for some negative surprises. Since I do not have
a strong case for a rapid, positive turnaround, I currently
view profit prospects for 2007 as much more subdued than
in recent years.
My longer term inflation indicator has tumbled since 2006
and is in a firm downtrend as we roll toward 2007. This
suggests we should go into next year with a benign inflation
environment. Even so, there are issues. US productive
capacity growth has picked up a little more to 2.4% yr/yr
through Nov. '06. That is nice, but capacity growth still
trails longer run economic potential which, in my book,
adds inflationary bias to the economy, despite productivity
gains. Moreover, capacity utilization in the extraction and
primary stage processing sectors is running high, with little
capacity growth yet in evidence. Couple these concerns with
a backdrop of firm global growth and rising capacity utilization
and you have inflation "in potentcy" as Thomas Aquinas liked
to say. So, I do not see a clear shot at saying inflation will
not be a problem next year. Hence, I am in the back seat on
this one, too.
We have completed nearly five years of economic recovery. The
years when business around the world is easily building its
book of business are the pleasant years of rising confidence
and expectations. But history suggests these periods have
rather finite durations, and I suspect 2007 may usher in an
interval when a maturing global expansion may produce some
events that begin to challenge confidence. I do not have
a bag of "surprises" to lay out, just a sense that it might
be wise for business and financial / capital market players
to switch off of cruise control and get back to day to day
manual operation and vigilance.
I am planning several more posts on the 2007 environment for
the various markets before '06 runs out.
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