Magazine article Economic Trends

The Economy in Perspective

Magazine article Economic Trends

The Economy in Perspective

Article excerpt

Time to take a load off ... Conventional wisdom--in other words, the central tendency of professional forecasters--holds that 2006 and 2007 will be decent years for the U.S. economy. Many economists expect real GDP to increase by about 3 1/2% this year and next, keeping the economy on a path of nearly full resource utilization. The January employment report from the Bureau of Labor Statistics supports this comforting view: Net employment expanded at a solid rate in January; in fact, the revised figures for November and December show that job creation has been improving for some time now. And consumer confidence has been rebounding from its Katrina-induced lows.

Inflation, which has been elevated by energy price shocks, seems poised to gradually drift down to its longer-term trend. Considering the magnitude of the energy price shocks that have hit the economy, core inflation rates have been exceptionally stable. Moreover, inflation expectations five to ten years out have hardly budged in the face of these shocks, signaling a high degree of confidence in the future conduct of monetary policy.

On the surface, there are many reasons to have confidence in the U.S. economy's ability to continue providing its people with one of the highest living standards in the world. Beneath the surface, however, lie disquieting possibilities. The nation faces challenges that have the potential to slow the pace of economic growth if they are not managed effectively.

Fiscal policy is one of these challenges. The federal budget deficit looms large in proportion to the scale of the economy and shows no signs of shrinking. In fact, unless Congress can reign in expenditures for numerous entitlement programs, or demonstrate a greater willingness to pay for them from current taxes rather than with debt, the fiscal obesity that is our national debt will swell even further.

Marketing the national debt at an attractive price has been surprisingly easy for the past several years, primarily because of foreign buyers' powerful appetites for highly liquid, dollar-denominated assets. Some analysts contend that these appetites spring from certain foreign governments' desire to manage their exchange rates; other analysts argue that the motive is to accumulate a stock of dollar reserves that a government could use to defend its exchange rate when it begins to float more freely. …

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