Economic Update

Recently I was in Spokane, WA, and shared the podium with Ed Seifried, an economist with Lafayette College. Here are some of Seifried’s thoughts on the economy.

· Gross National Product (GDP) growth will slow to 2.0-2.5% on an annual basis compared to 3.0-4.0% in recent years. The ideal growth rate is 3.2%.
· He projects core inflation to be 2.0%, down from 3.0%.
· The Federal Funds Rate is expected to be 4.25% by year end, down from the current level of 5.25%.
· The price of a barrel of oil will most likely range from $40 to $60 for 2007.

Storm Clouds On The Economic Horizon
Watch housing starts because they have slowed from 2.3 million to 1.6 million annually. The housing wealth effect has a much larger impact on spending than previously estimated. Every time a home’s value increases by one dollar, the household spends about 9 cents more, as compared to previously estimated results of 4 cents.

Home values are declining 18-30% in some areas of Florida, but Seifried does not predict a housing crash nationwide.

The energy crisis will be a possibility if additional players are brought into the war.

Editor’s note: Dave Kohl, The Corn And Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.