Wednesday, November 22, 2006

White House Says Slower Growth; Higher Inflation

Yesterday Edward Lazear, Chairman of the Council of Economic Advisers at the White House, lowered his growth forecasts. These forecasts are produced twice a year for budgeting purposes.

He called for 3.1% economic growth for 2006. That is a healthy figure, but down significantly from the June forecast of 3.6%. For 2007, he is projecting growth of 2.9%. The reduction in the forecast is primarily due to the slowing housing market.

The White House is also projecting 2.3% inflation for 2006. Despite slowing growth, it expects inflation to rise to 2.6% in 2007. But with unemployment at only 4.4% and calls for a higher minimum wage, there is a good chance that inflation will be higher. And if oil prices reverse themselves and start moving back up toward $70 a barrel, inflation will become problematic.

The housing slump and energy prices are key to what the future holds. The numbers of homes available for sale are rising quickly. Home prices will continue to fall. Homebuilders will continue to report declining earnings.

As for energy, that really depends on what OPEC does. Energy traders are skeptical about OPEC's ability to stick to announced production cuts. Saudi Arabia is the big player in this game. If the Saudis were to cut production significantly, oil prices would move higher. But if the Saudis see that other OPEC countries are not doing their fair share, they may actually raise production to teach them a lesson. That, of course, would cause oil prices to plummet.