The Fed Will Keep Recession
at Bay with Rate Cuts in 2007
A significant inversion of the yield curve since
July 2006 has many worried that the economy
is headed for a recession. However, I see
numerous signs in the economy that signal
the Fed will start cutting the interest rates in
spring 2007 for a total of 75 basis points by mid-2007 to help
keep the current economic moderation from morphing into a
recession or even a prolonged period of sub-par growth.
The upside-down yield curve is a serious cause for concern. An
inverted yield curve usually signals that there is a weakness in
the economy, and recessions almost always occur whenever the
yield curve is inverted substantially for a certain length of time.
This was the case before the 1973 recession, the double-dip
Volcker recessions in the 1980s, and as recently as 2001.
There are three additional reasons why the Fed will begin easing
rates soon. First, they have just about achieved their goal of
moderating runaway housing activity. Housing starts are now
much closer to the sustainable 1.6 million unit pace, and the
direction for new and existing home sales is clearly downward.
Second is the decrease in the price of oil. And finally, consumption
growth has been slowly inching its way down from the
strong 3.9 percent rate we saw in 2004 to a pace of about 2.8
percent over the last six months. The idea is to get that number
just a little below 2.5 percent for a while but not crush it into
oblivion while fighting the mild inflation problem we currently
are experiencing.
Cutting interest rates will help correct emerging financial imbalances
in the economy. If oil climbs back to $70 per barrel or
housing starts creep toward the 2 million unit level again, then
the Fed will be forced back into the game.
Fortunately, the chances of these two events happening are
very remote.
Currently Georgia’s economy is holding on but will slow down
over the next few years, keeping in sync with the national
economy. Despite the slowdown, there are still bright spots for
Georgia’s job seekers in several key industries.
Georgia created 92,000 jobs in 2005, but the pace in 2006 was
slower – only 72,800 in the last 12 months. Going forward, sectors
like health care, tourism, and retail will still add jobs in the
next few years, but the pace will be slower. There are certain
subsectors within each of those industries that show particular
promise for employment, including hotels, arts, entertainment
and recreation, hospitals, insurance, trucking, and scientific jobs.
Another bright spot for Georgia is the continued growth in cities
such as Warner Robins, Brunswick, and Savannah, which will
outpace the state’s 2.1 percent growth and post job increases of
3.5 percent, 3.3 percent, and 3.2 percent, respectively.
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