- Real GDP Growth. Recent data suggests that the economy is already well on its way to reaccelerating. What's more, several prospects show that the economy could easily exceed its potential or trend growth rate in the second half of the year, including:
- Consumer spending is expected to slow from the torrid pace of the fourth quarter 2006 and first quarter 2007, but not go under.
- Business investment is expected to pick up after a hiatus late last year.
- Inventories are finally rebuilding after a year-long drawdown and are expected to hold at slightly higher levels once the economy reaccelerates.
- Government spending is expected to remain somewhat suppressed but will pick up slightly from the start of the year. State and local government spending is expected to do particularly well as most state and local budgets are in surplus.
- The trade deficit is expected to narrow slightly with the tail wind of stronger growth abroad and a weak dollar helping to keep exports afloat.
- Inflation. Core inflation is expected to remain somewhat elevated.
- The Fed is expected to hold rates steady through the end of the year, and then resume tightening in early 2008.
- Long-term interest rates are expected to continue to move up modestly in the near term.
- Profit growth is expected to slow, but will continue to surprise many on the upside.
Risks to the forecast include:
- The ongoing correction in the housing market remains the primary threat to the forecast.
- Business investment, which continues to lag, despite signs of a pick up is also a risk.
- Another risk is that inflation remains more persistent and that the Fed must tighten more aggressively.
- Finally, there are the 2008 elections, which up the risk of a political misstep.
"The economy is poised to reaccelerate in the second quarter, and will likely exceed expectations in the second half of 2007 and into 2008," concludes Swonk.