By Brian E. Clark
MADISON – Wisconsin’s economy will moderate during the first two quarters of 2007, but should pick up again after midyear, continue to add jobs and grow at a rate that could approach 3 percent, according to two economists who spoke Tuesday at the annual Wisconsin Economic Forecast Luncheon.
The housing market will also continue to cool, which may have some effect on consumer spending. Inflation should also stay below 2.4 percent, but there is little chance of recession in the coming year, they agreed.
The event, which drew more than 300 people, was sponsored by the Wisconsin Bankers Association. The two economists who spoke were Samuel Kahan of the Federal Reserve Bank of Chicago and John Tuccillo, a real estate and housing specialist with JTA, Inc. in Arlington, Va.
“I see some weakness in the early part of 2007,” Kahan said, with housing, manufacturing and the auto industry being the soft spots of the U.S. economy. But he said the chance of recession is less than 20 percent.
Kahan also predicted that energy prices will remain stable, which is one of the main reasons inflation will be low, probably les than 2 percent.
“I know that’s a pretty bland picture, but there you have it,” he quipped.
However, he said things could become much more interesting if housing prices fall dramatically, consumer spending tanks because of high debt or if oil prices bolt upward.
He also said he worries at times about the economic fallout from widening war in the Middle East or conflict in Russia, which is a major energy producer.
Kahan praised Wisconsin for creating thousands of knowledge-based jobs in the past few years, including in manufacturing, and said the state should strive to continue that trend.
Tuccillo, whose focus is on real estate, said more than $1 trillion in adjustable rate mortgages (ARMs) will go up 25 percent this year. He said that will force many homeowners to refinance into new ARMs or switch to more expensive fixed-rate mortgages.
“This could cause a lot of consumers to reduce their spending,” he said. “How they react will affect the economy.”
He also said he fears that populists recently elected to Congress might enact legislation that could reduce world trade.
“That would be bad because if we pull up the gang plank, our economy will suffer,” he said, noting that the United States no longer has factories that make many low-cost products.
Tuccillo called the Wisconsin housing market “stable and boring” unlike parts of Florida, where a glut of homes and condos has caused sales to fall by more than 50 percent in recent months.
If employment and population continue to increase, there will be a demand for housing – though it won’t be as strong as it was during recent boom, he said.
“Housing will not be the engine of growth that it was,” he said. “Not in 2007, when it will either be neutral or negative in many areas. But by 2008, growth could be positive again.”
A “wild card” for Wisconsin, he said, is where retiring baby boomers decide to live in coming years. If they choose to leave the state for warmers climes, that might depress demand. Then again, they might choose to keep a second home in the Badger State, he noted.
By the year 2015, he predicted the nation will experience another housing boom, when Generation Y members (born after 1977) are buying homes. He said that cohort will be larger than the Baby Boom generation and have an even bigger impact on the housing market.