Despite Hurricanes Katrina and Rita, the U.S. economy grew by an annual rate of 4.1 percent in the third quarter of 2005. This follows two quarters of slower-than-expected growth, bringing predictions of growth for the year to between 3.6 and 3.7 percent.
Slower economic growth is on the horizon for 2006, according to recent forecasts from three key sources: the Congressional Budget Office (CBO), the Federal Reserve Bank's "Survey of Professional Forecasters," and The Economist. The CBO and Federal Reserve predict an annual growth rate of 3.4 percent in 2006, with The Economist's forecast a bit lower at 3.3 percent.
Reasons for the predicted slowdown include an increasing budget deficit (as a result of tax cuts and increased spending), increasing national debt, and increasing interest rates.
Deficits & Program Cuts
Proposed tax cuts, together with increasing government spending, mainly on the war in Iraq, military operations in Afghanistan, and homeland security, result in an estimated budget deficit of $317 billion for 2005 and a projected $314 billion deficit in 2006.
The current administration is pushing to make earlier tax cuts permanent – while also paring down spending on government programs other than the military. According to the December Presidential Agenda, the proposed budget will "terminate or reduce more than 150 government programs."
The CBO estimates that since 9/11 the Department of Defense (DoD) has spent $197.5 billion on the war on terrorism, including homeland security and activities in Afghanistan, and on Iraqi operations. Future cost estimates based on various scenarios range from $141 billion to $336 billion between 2006 through 2014. The least expensive scenario required a decrease of troop levels in 2005 (which did not happen) and total withdrawal from Iraq by 2009.
Budget deficits add to the existing national debt, expected to reach $8.6 trillion in 2006. CBO reports indicate the fastest-growing spending category in the government's budget in 2005 was interest costs of the public debt.
Pressure on Interest Rates
Funding the national debt in financial markets requires competition for resources with private companies and consumers, which results in higher expected interest rates in 2006. Economic activity will be affected negatively by the higher financing costs borne by companies, as well as higher borrowing costs for consumers in purchasing goods and services. Higher interest rates will also affect the housing market, as the financing costs associated with home purchases increase, putting downward pressure on economic activity in this leading sector.
Monetary Policy an Uncertainty
A key uncertainty for 2006 is the direction monetary policy will take under the newly appointed Chair of the Federal Reserve, Ben Bernanke. Being an expert in monetary policy, Mr. Bernanke is by all accounts a well-qualified replacement for Alan Greenspan, who held the post for more than 18 years.
Mr. Bernanke is expected to continue the current Fed policy of raising interest rates. Interest rate estimates for 2006 from the Survey of Professional Forecasters are substantially higher than CBO estimates: 4.5 percent for the three-month Treasury Bill versus 3.7 percent, and 5.1 percent for the 10-year Treasury Note versus 4.7 percent. This divergence in forecasts may reflect uncertainty about Mr. Bernanke's new style and policies.
In 2005, inflation hovered at 3 percent with increases fueled by higher oil prices. The CBO predicts lower inflation in 2006: a 2.5 percent increase in prices. The Professional Forecasters' prediction is slightly lower, at 2.4 percent.
Unemployment Stable to Improving
Last year was hard on domestic automakers. General Motors was downgraded to junk bond status, and the auto industry had the highest number of layoffs of any industry – more than 100,000 jobs in 2005, as reported by Reuters.
Despite these job losses, the forecasts predict stable or decreasing unemployment in 2006. The CBO estimates an unemployment rate of 5.2 percent, the same as the 2005 estimate. Fed forecasters predict the job market will improve, with unemployment falling to 4.9 percent.
|OVERALL U.S. FORECASTS*|
|Congressional Budget Office||Federal Reserve Bank's "Survey of Professional Forecasters"||The Economist magazine|
|Real GDP Growth||3.7%||3.4%||3.6%||3.4%||3.6%||3.3%|
|•3-Month Treasury Bill||3.0%||3.7%||3.2%||4.5%||4.2%||n/a|
|•10-Year Treasury Note||4.3%||4.7%||4.3%||5.1%||4.5%||n/a|
|Budget Deficit (as % of GDP)||-2.7%||-2.4%||n/a||n/a||n/a||n/a|
|* Note: 2005 data based on most recent actual figures. 2006 data are most recent projections.|
|CONGRESSIONAL BUDGET OFFICE ESTIMATES OF DOD SPENDING ($ BILLIONS)|
|Source: HispanTelligence®‚ calculations using data from Tables 1, 2, and 4 in "Estimated Costs of Continuing Operations in Iraq and Other Operations of the Global War on Terrorism," Congressional Budget Office.|
|California||Housing slowdown with accompanying reductions in consumer spending and job losses in real estate-related industries.||UCLA Anderson Forecast|
|Texas||Expected growth in manufacturing sector, durable good growth larger than in non-durables, and increases in Texas labor force.||Texas Manufacturing Outlook Survey|
|Florida||Economic damage from hurricanes, but stimulus with re-building; employment growth, but larger population growth.||Econocast, Fishkind & Associates, FL|
|Hispanic Sector Vitality Sparks Marketers' Interest|
The charm of the U.S. Hispanic market lies partly in its purchasing power growth – about 9.71 percent in 2005, according to HispanTelligence®. And though this growth is expected to slow, to about 6.8 percent in 2006 – bringing Hispanic disposable income to about $820 billion – that's still stronger than projected growth for the market overall. (For details on the dynamics of Hispanic market growth from HispanTelligence, see "Energized Demographic in a Slow Economy," at http://www.hispanicbusiness.com/go/energized/ )
This continues a trend market planners haven't ignored. Yankelovich Inc., a leading marketing research and consulting firm, emphasizes in its predictions for 2006 that the Hispanic market is "a main driving force" and "catalyst for growth" in the American economy, destined to receive heightened attention from marketers this year and beyond.
Hispanic Business asked Sonya Suarez-Hammond, Yankelovich's director of multicultural marketing, to expand on these predictions. Her response – "The New Cachet of Being Hispanic," at http://www.hispanicbusiness.com/go/cachet/ – cites research-based findings and statistics reported in the 2005 Yankelovich MONITOR "Multicultural Marketing Study."