The U.S. economy will struggle to shrug off a cooled housing market and a burgeoning fiscal deficit in the first half of 2007, but will regain some momentum in the second half of the year. That’s the prognosis of Michael Knetter, dean of the University of Wisconsin-Madison School of Business. Knetter, a former economic advisor to Presidents George H.W. Bush and Bill Clinton, provides his macroeconomic outlooks annually at the Northern Trust Economic Trends Breakfast. Small Business Times executive editor Steve Jagler recently interviewed Knetter about the economic outlook for 2007. The following are excerpts from that interview.
SBT: Bottom line it for us – What percentage growth do you foresee for the U.S. economy in 2007ω
Knetter: “I think 2007 will start slow as the economy is adjusting to the housing slowdown, but that it will again gather momentum as the year unfolds. I see growth in real GDP (gross domestic product) of about 3 percent this year.”
SBT: What sectors of the economy are poised for the most growth in 2007 and whyω
Knetter: “The underlying driver of growth in the U.S. economy is the continual development of new technology-based businesses and then corresponding growth in various service sector activities. I believe that bio- and info-tech sectors will continue to advance in the year ahead. I also believe that energy will remain strong.”
SBT: What sectors of the economy are poised to lose in 2007 and whyω
Knetter: “The secular decline of employment in manufacturing and agriculture that has resulted from globalization and technology change will slow a bit due to the weaker dollar, but the underlying trend remains weak. Real estate will also remain soft this year.”
SBT: Will the American housing market continue to languish, and if so, how is that spilling over into other aspects of the economyω
Knetter: “I think the housing downturn has hit bottom at the national level, although some markets are ahead or behind the average. The housing slowdown has cooled the overall economy somewhat and is the reason I think 2007 will start out a little slow.”
SBT: How will the stock market behave in 2007ω
Knetter: “Last year exceeded my expectations, but I look for modest growth in equity valuations of about 8 percent in 2007.”
SBT: What will the Fed do with interest rates in 2007ω
Knetter: “I expect rates to remain steady as risks are balanced between economic slowdown and inflation.”
SBT: Will the value of the U.S. dollar continue to stay weakω What will be the impact on U.S. manufacturersω
Knetter: “I see no big changes in the dollar, but, if anything, I envision modest strengthening, because I believe markets became overly pessimistic about U.S. economic prospects.”
SBT: What kind of employment numbers and trends do you foresee for 2007ω
Knetter: “Unemployment should remain stable at its currently low levels, while employment growth tracks the growth in the labor force, adding maybe just over 1 million new jobs in 2007.”
SBT: Which direction will energy costs move in 2007ω
Knetter: “Energy costs will stabilize, but at the currently high levels – at least judged by historical standards.”
SBT: What are the most significant changing trends and factors for doing business in Chinaω
Knetter: “I do not see any big changes with China at this time. Current business trends there seem likely to continue.”
SBT: What are your thoughts on the war in Iraq, and what are its implications for 2007ω
Knetter: “The situation in Iraq is very hard for me – or anyone – to predict. I think we have learned firsthand why this diverse country was ruled by a ‘strongman.’ It is hard to see a stable government emerging from the current situation. I think the impact of Iraq on the U.S. economy is mostly already absorbed in terms of the drain on manpower and its implications for fiscal policy. The overall security situation in the Middle East remains a source of risk.”
SBT: With the Democrats controlling Congress, what kind of economic policy changes do you foreseeω
Knetter: “I think we will see increased efforts to improve the social safety net, particularly in the area of national health care policy. There is also likely to be an effort to shift the tax burden toward higher income households. However, I am not optimistic that this Congress and this President will find enough common ground to make any real progress on any issues. I think the chances for partisanship and gridlock are very high.”
SBT: How concerned are you about the steep federal deficits and U.S. trade deficitsω
Knetter: “I think our fiscal policy leaves much to be desired. We are spending too much on low-return activities, for example, Iraq, and paying for too much of that spending with debt (hence the deficit). I would be much happier if we could focus more effort on education, health and important parts of the economic infrastructure, such as transportation. I also believe the tax code needs to shift away from taxing people’s labor effort and toward taxing consumption, particularly consumption of goods and services that we believe have negative externalities associated with them (e.g., energy, emissions, health hazards, etc.).”
SBT: Relative to the overall U.S. economy, how will Wisconsin fare and whyω
Knetter: “Wisconsin has lagged the U.S. in income growth for quite some time. I expect we will continue to lag, but not quite as much this year, since the weak dollar will give some reprieve to manufacturing and agricultural exports. Until Wisconsin gains a bigger presence in ‘knowledge economy’ industries, where the majority of employees have college degrees or more, I expect that this trend will continue.”
