2007 economy off to a brisk start

BY MORRIS R. BESCHLOSS

PVF and economic analyst

With the last quarter of 2006 projected to have grown at 3.5%, it’s apparent that the fourth quarter economic momentum will carry along into the first half of 2007.

Although most economic pundits have doubted the U.S. economy’s ability to match the 3.4% gross domestic product growth rate of 2006 -- or even the 3.2% 2005 uptick -- it now looks as if a 3%-plus jump in 2007 is entirely possible. However, America’s gigantic $13.5-trillion gross domestic product has lately been experiencing a shift in the major sectors comprising its volume.

With the consumer continuing to be the driving force throughout 2005, the year 2006 proved America’s economic flexibility by the emergence of strong business investment that more than made up for the slowdown in residential construction, as well as the slacking off in general consumer spending. Also, a boomlet in commercial and industrial construction helped 2006 overtake the previous year in total growth despite expectations to the contrary.

The biggest surprise, however, was the emergence of exports as a major driver in keeping the overall economy in high gear. Exports increased by 10% in the fourth quarter alone, raising the total revenues generated for the year to over $1.3 trillion. This was almost 10% of the gdp total revenues, amassed by the record-breaking export sector. Imports, led by lower energy costs, actually fell by 3.2%, the first such decline since the fourth quarter of 2001. At the same time, the strong export push surged 9% for the year, up from a 7% improvement of 2005 over 2004.

Although the trade deficit still came in at close to $800 billion, it reversed a gap that had significantly widened since the turn of the century.

With the U.S. dollar expected to weaken against a basket of major foreign currencies, American goods will continue to improve their competitiveness. The salient components of America’s export expansion continue to be commercial and military aircraft, construction and general industrial machinery and components, foreign cars and trucks manufactured in the U.S., and armaments, of which the U.S. is by far the most voluminous exporter.

As the 2007 economy unfolds in its early stages, it’s becoming clear that consumer spending is slowing perceptibly. It was down to a growth of 3.2% in 2006, after growing 3.5% in 2005 and 3.9% in 2004.

Residential expenditures for new homes and improvements dropped 19% in the fourth quarter 2006 after easing 18.5% in the third quarter. This was the largest real estate spending decline since March 1991 -- a pattern that has degenerated throughout 2006. Such a major drop followed a more modest 4.2% decline in 2005.

This sharp downturn represents the largest annual decline in 15 years, and a massive reversal from the near 10% growth rates achieved in 2004 and 2005.

Despite an expected slowdown in capital investment this year, exports and the continuing industrial recovery are expected to be the lead factors to keep the U.S. economy at a near 3% expansion in 2007.

Whether such growth stays steady throughout the year, however, is dependent on whether the residential recession stabilizes and continues to be offset by commercial, institutional and industrial construction.

Foreign investment, which has remained strong in the last three years, could also influence the extent of this year’s economic strength.

Such ongoing vitality could also be influenced by President Bush’s willingness to wield the veto pen against Congressional legislation hostile to sound business expansion strategies.

Morris R. Beschloss, a 50-year veteran of the pipe, valve and fitting industry, is PVF and economic analyst for The Wholesaler.