New York, NY, January 12, 2007--While the U.S. economy is rolling through a soft patch--mainly because of a market correction in housing, weaker than expected consumer spending, and a long-overdue slowdown in manufacturing activity--stronger growth is ahead in 2007, according to an analysis released today by The Conference Board, the global research and business membership organization.
"The U.S. dollar has been hard hit because markets anticipate that short-term interest rates will decline, an expectation that is reflected in both the forward rates and the sharp decline in 10-year Treasury yields," says Gail D. Fosler, executive vice president and chief economist of The Conference Board. Her analysis appears in StraightTalk, a newsletter designed exclusively for members of The Conference Board's global business network. "But these observations are backward looking and do not reflect how changed dynamics have set the stage for a shift toward somewhat better growth in 2007."
New growth forces include a decline in gasoline prices that should add at least a percentage point to consumer spending growth over the next several months, a drop in energy prices from their peaks, and low long-term interest rates that are stimulating another round of consumer refinancing.
Although the Institute for Supply Management (ISM) index dipped below 50 for the first time in more than three years, the December report shows the manufacturing sector is gaining strength. Gains in new export orders, rapid inventory cuts, and new product introductions in the auto sector will help stabilize manufacturing. Moreover, the recent ISM survey also showed price increases picking up. Manufacturing still enjoys a broad base of demand, both domestically and internationally, suggesting the current adjustment will be brief.
Despite weaker U.S. economic performance, moderate to rapid growth is underway in almost every other part of the world.
"For the first time in many decades, the global economy enjoys multiple sources of economic growth, of which the U.S. is not the most important," says Fosler. "From the ongoing restructuring in Europe, to rapid growth across most sectors in China and India, to the related benefits of strong agricultural and raw materials demand elsewhere in the emerging world, the current global expansion is one of the broadest since the 1970s."
The acceleration of growth in other parts of the world breaks a well-established tendency in recent years for the U.S. economy to lead economic trends globally. Fosler says that while it is much too early to "declare victory," the expansion of economic opportunity outside of the U.S. could open the door to redressing the huge global imbalances in consumer spending and trade.
The Conference Board forecast for Europe expects growth to approach 3 percent this year and continue at around a 2.5 percent rate next year. These rates are the highest since 2000, but they are far less robust than the growth underway in other parts of the world. A better job picture has helped propel European consumer confidence to its highest levels since 2001, although still far below the highs reached in the late 1990s.
Against a backdrop of decent but relatively bland growth in the advanced economies (including Japan), China, India, and much of the emerging world continue to boom.
Although interest rates are edging up, Indian growth has accelerated from almost 8 to over 9 percent in the past year. But the sustainability of such growth is a major issue in both India and China. Still, both countries are awash in liquidity, making the prospect of a slowdown resulting from central government actions remote.
Rapid growth in China and India is helping sustain the commodities boom that, along with high agricultural prices, is driving growth in Latin America, Africa, Russia, the Middle East, and elsewhere.
