WisBusiness: Economist says Wisconsin economy will slow by end of year

By Brian E. Clark

MADISON – Wisconsin’s economy should continue to do well through the end
of this year and benefit from the strong global demand for construction,
manufacturing, mining and other capital equipment, a top economist
predicted Friday.

But Don Nichols, who directs the La Follette School of Public Affairs at
UW-Madison, said growth for the state will fall from around 3 percent to
2.5 percent by 2007.

After that, the picture becomes a bit murky, Nichols said in Business
School Management Institute address.

“2007 remains a risk,” he said. “If the Federal Reserve increases rates
much more a recession in 2007 is possible.”

And if Ben Bernanke, the new Fed chairman, asked him, Nichols said he
would say that interest rates have been raised enough.

“No one expects rates to be raised more than an additional half percent,”
he said. “But I see the risk of weakness being greater than the risk of a
permanent increase in inflation.”

Nichols said he has high hopes for Bernanke because he seems to be a
“flexible” fellow and may be willing to listen to voices saying that the
economy will slow without an increase in inflation.

On the housing side, Nichols said he does not foresee a decline in housing
prices in the Badger State because they never escalated the way they did
in states such as California, Nevada and Florida.

“The more conservative markets, including Wisconsin, will simply see a
slowing in the rate of price increase,” he said.

“House prices have never collapsed in one day the way the stock market has
crashed after a bubble. Housing is not like stocks where one day a
fraction of the investing public can try to get out of the market

Nichols predicted, however, that consumer spending will slow at a rate
below the rest of the economy because people will no longer be withdrawing
equity from their homes through re-financing.

“This means we cannot expect consumer spending to be the engine that pulls
the economy in the next few years the way it has in the recent past,” he

Moreover, some households will be squeezed when the increases in housing
prices ends.

“Some of the mortgages issued in the past few years were based on the
assumption of ever-rising house prices and there will be some consumer
bankruptcies when these dreams are not fulfilled.

“Barring a huge decline in prices, however, these bankruptcies will not be
widespread and will not contribute much to the economy’s declining rate of
growth,” he predicted.

Nichols said the economy has shown during the past year that it can handle
oil prices in the $60- to $65-a-barrel range.

He said oil experts are predicting no major price increases, but that is
based on stability in the Middle East – always a risky proposition.

The economist said the U.S. trade deficit remains what he called a “huge”
problem. It reached $723 billion last year, a figure Nichols said he never
thought he would see.

“It can’t continue at its current rate indefinitely,” he said. “Debt to
foreigners would mount, interest costs on the debt would mount and a
self-sustaining spiral could emerge.”

Ultimately, he said it will take a multi-national agreement to solve the
U.S. trade deficit problem and steer the world’s toward a “benign”

“I see another year of the same,” he said. “But if it continues for a
decade, we could be embarking on a disastrous downhill trend.”

Part of the solution, he said – and one that could help Wisconsin – is to
press countries like China to import sophisticated capital equipment.

“The best solution is to keep trade flowing,” he said. “Our deficit isn’t
just the fault of the Chinese. But they certainly can be part of the