Outlook 2007
Economy, stocks look set for a happy new year
So rather than stagflation, it seems plausible that the American economy will experience a pleasant mix of growth and price stability. Continued strong consumer spending lies at the heart of the consensus Wall Street economic forecast for 2007, which is for the economy to grow roughly 2.5 percent with moderating inflation. That sounds about right to Quincy Krosby, chief investment strategist at the Hartford. "With a job market like this one, it's pretty hard for me to forecast a recession," Krosby says.
The skimpy 4.5 percent unemployment rate, the lowest since the '90s boom, hardly indicates just how strong the job market is right now. The economy added an average of 161,000 new jobs a month through November. Then add 68,000 to that number-that's how much the Labor Department thinks it's been undercounting job growth. Lots of jobs mean stronger wage growth, which keeps consumers spending. Hourly wages were up nearly 3 percent after inflation through November, and real disposable personal income grew a solid 0.3 percent in November.
Good times. You also don't forecast a recession when corporate profits are surging. Adjusted pretax profits rose at a 17.7 percent annual rate in the third quarter, according to JPMorgan Chase. "The economic backdrop is a healthy one," says Bruce Kasman, the firm's chief economist.
So what is the Fed's next move? Judging by the 30-day federal funds futures contract traded at the Chicago Board of Trade, investors are betting that the Fed might cut rates by a quarter point some time in mid-2007. A hike in rates would be a nasty surprise, particularly to stock investors who are wagering on a soft landing. That bet is a big reason behind the Dow's late-2006 run to a record high. Wall Street will continue to obsessively pore over the inflation and housing data, especially, as it frets about the Fed overtightening.
Still, as the various economic reports trickle in during the first part of the year, get ready for a bumpy ride at times. "I think we will be struggling to make sense of the data," Krosby says. "Some days it will look like a recession is around the corner and the next that data will defy that conclusion." So just keep on truckin', brother. Everything's going to be copacetic.
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