Current Economic Conditions and Selected Forecasts
Summary
U.S. real GDP growth has been positive for 18 consecutive quarters, and theeconomy is considered to be in an “expansion” phase. As of the second quarter 2006,real or inflation-adjusted growth was nearly 16% above its previous high near the endof the 1991-2001 expansion.Real GDP grew at an annualized quarterly rate of 1.6% in the third quarter of 2006, down from a 2.6% and 5.6% rate during the second and first quarters. Thiscompares with annualized rates of 3.4%, 3.3%, 4.2%, and 1.8%, respectively, overthe four quarters of 2005. The corresponding rates over the four quarters of 2004were 3.9%, 4.0%, 3.1%, and 2.6%.The rebound in payroll employment has been modest compared with pastexpansions. During October 2006, it was about 5.0 million above the levelprevailing at the end of the recession (November 2001), but only about 3.3 millionabove the peak of the last expansion (March 2001). The unemployment rate rose toa high of 6.3% in June 2003; it has since declined and now (October 2006) stands atan expansion low of 4.4%. The low achieved during the last expansion was 3.8%.The other elements in the economic picture are promising:(1) A pick-up in output at the same time as employment is growing slowly means thatproductivity (or output per worker) is increasing. As seen in the 1990s, productivitygrowth is the key to raising the standard of living and is not necessarily associatedwith weak labor markets over time. The United States eventually experienced
both
rapid productivity and strong employment growth as the recovery broadened anddeepened throughout the decade.(2) The headline inflation rate, measured by the CPI, rose 3.4% during 2005. Thiswas largely driven by rising energy prices as the core inflation rate, which excludesfood and energy, rose only 2.2%. For the three months ending in October 2006, theheadline CPI fell at an annual rate of 2.9%. Excluding food and energy, it rose at anannualized rate was 2.3%. Thus, it can be argued, the underlying or core rate of inflation appears to be restrained.The consensus among economists is that GDP will grow between 3.3% and3.5% in 2006. The unemployment rate is expected to show little tendency to change.The inflation rate is expected to be higher than the rate that prevailed in 2005. On17 occasions beginning on June 30, 2004, and concluding on June 29, 2006, theFederal Reserve has increased the federal funds rate target by ¼%, raising the targetto 5¼% from 1%. No additional tightening has been undertaken at four subsequentmeetings. Fiscal policy tightened during 2005 and 2006. The international tradedeficit is large and expected to remain so. This report will be updated monthly.
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