Viewpoint: My Economic Predictions for 2006
By Dean Michael Knetter
608/262-1758
mknetter@bus.wisc.edu
www.bus.wisc.edu
The Small Business Times magazine recently did an excellent article on “Thriving in a ‘Schizophrenic’ Economy.” In it, several members of the board of directors of the Milwaukee Council of Small Business Development were asked to examine the outlook for their companies. As dean of the UW-Madison School of Business and an economist by training, I was asked to make some general predictions for the coming year.
I’d like to share those predictions with you and would enjoy hearing back from you on whether you think they are on target.
Gross Domestic Product—I see a 3.7% growth in real GDP as we continue to see strong growth in productivity and expansionary fiscal policy driven by the war in Iraq and post-Katrina reconstruction. (For those interested in boosting productivity in their organizations, we have a full array of open enrollment and custom executive education programs at UW-Madison.)
Interest rates—I think it’s likely we’ll see an additional increase in short rates of 50 basis points under new Fed Chairman Ben Bernanke, with a smaller increase in long rates as he earns credibility as an inflation fighter.
The U.S. dollar—Sideways.
Wages—Total compensation will grow by about 3% in real terms (close to the growth in our productivity), but blue-collar wages will grow less than white-collar salaries due to changing supply-and-demand conditions. Wages and salaries will grow by less than total compensation because of the higher rate of growth in benefit costs relative to pay in total compensation.
Inflation—The inflation rate will stabilize at this year’s rate of about 3.5% as commodity prices stabilize—The Economist commodity price index rose by 14% this past year which drove much of the uptick in inflation.
Unemployment rates—I expect a continued slight drop to 4.6% by the end of 2006. The job market for UW business graduates looks to be very strong this year.
Industry sectors poised for growth—The technology-producing, technology-adopting and R&D-intensive sectors will continue to grow.
Industry sectors poised to decline—Automobile and related industries will continue to contract, as will other sectors intensive in unskilled labor.
The impact of the distressed U.S. automotive industry—On a national scale, the impact will be small, but it will have a more pronounced effect in this region due to the supplier network.
The Wisconsin economy—We will continue to grow at close to the national average this year, but the strengthening of the dollar over the last year will be a slight drag on manufacturing and farm prices.
The stock market—The DOW, NASDAQ and S&P500 should all grow at about 8% in 2006.
Overall, I remain optimistic about how the two forces of globalization and technology change position the U.S. economy vis-à-vis the rest of the developed world. Our flexible markets in labor and capital permit our firms to adapt to the rapidly changing environment in ways that boost productivity and efficiency. We have seen lots of outsourcing in areas where it makes sense and plenty of re-organizations as firms exploit new information technology advances. While this process of creative destruction can look messy at times, it is what “progress” looks like in a dynamic capitalist system. The momentum that we have from these large trends will continue to overshadow what I believe is shaky fiscal policy and a precarious international position.
Of course, I’m not trading on these predictions and I do not suggest that you do, either. Instead, stay fully invested in a balanced portfolio of stocks and bonds with adequate diversification.
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