Press Releases

Assistant Secretary of the Office of Economic Policy Phillip Swagel Statement

(Archived Content)


For the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association

Economic indicators have broadly improved since the Committee last met three months ago. Economic activity appears to have strengthened in late 2006, the labor market remains solid, and inflation has eased.

The labor market turned in a solid performance in 2006. The unemployment rate ended 2006 at 4.5 percent, close to a 5-1/2 year low. Payroll job gains averaged more than 150,000 per month during the year, with more than 7.2 million net jobs added since the employment trough in August 2003. The labor force participation rate increased in the final two months of the year and now stands at a 3-1/2 year high. Real wages grew strongly in the second half of 2006; coupled with a decline in energy prices, these income gains have helped to support consumer spending.

The advance estimate of GDP data for the fourth quarter of 2006 will be released on January 31. Real GDP grew 2.0 percent at an annual rate in 2006Q3, as declines in housing construction and a pullback in motor vehicle production offset expansion in other sectors. The decline in residential construction alone shaved 1.2 percentage points from Q3 GDP growth. Strength in nonresidential construction activity helped compensate in part for the slowdown in residential construction, with investment in nonresidential structures such as commercial buildings and offices up by nearly 16 percent at an annual rate in the third quarter.

Data released through late-January point to solid GDP growth in 2006Q4. Consumer spending remains buoyant, while strong corporate profits in the third quarter suggest that businesses have a solid financial base for future expansion and job creation. The trade deficit narrowed in October and November and net exports are likely to make a strong positive contribution to growth in the quarter.

The housing sector appears likely to remain a substantial drag on GDP growth in 2006Q4, but there are signs that homebuilding activity has stabilized. Housing starts were up in November and December (though still well below year-earlier levels), and building permits rose in December for the first time since January 2006. The pace of existing home sales in the last quarter was below year-earlier levels, but quite close to third-quarter levels, while new homes sales in the fourth quarter rose 5 percent from the third quarter. The inventory of new homes on the market equaled a 5.9 months supply at December's sales pace; while elevated, this is below the recent 7.2 month peak in July.

Importantly, the housing slowdown does not appear to have spilled over to consumer spending, which accounts for more than two-thirds of GDP. Retail sales growth in December was solid, and overall consumer spending appears to have accelerated noticeably in the fourth quarter after posting a gain of less than 3 percent in 2006Q3. Strong growth in wages, which represent the majority of income for most Americans, has likely been an important factor in supporting consumption. Real average hourly earnings grew by 1.7 percent over the twelve months ending in December, the largest annual rise since 2001. Survey data suggest that consumers are feeling relatively confident about current economic conditions and prospects over the near term. The University of Michigan survey of consumer sentiment reached a 3-year high in early January.

The Administration economic forecast underlying the Budget projects 2.9 percent GDP growth during the four quarters of 2007. This is in line with the consensus of private sector forecasts.

Headline inflation moderated substantially in the last three months of 2006. The consumer price index (CPI) was up 2.5 percent from a year earlier in December. This pace is well below readings in excess of 4 percent in the summer that were driven by double-digit increases in energy prices. Energy prices have retreated substantially since the end of last summer, at which time oil prices were above $70 per barrel and retail gasoline was above $3 per gallon. Mild winter weather across most of the United States has reduced heating demand, allowing key petroleum product inventories to rise to comfortable levels. Oil prices are averaging $55 per barrel through late January, and retail gasoline prices have declined from an average of more than $2.90 per gallon in the summer of 2006 to about $2.15 per gallon. A simple back-of-the-envelope calculation illustrates the positive impact of these developments on American families. The typical two-car household uses about 550 gallons of gasoline every six months. A 75 cent reduction in retail gasoline represents a per-household savings of more than $400 over that six-month period.

There was also improvement in the core CPI, which strips out the volatile food and energy categories. That price measure was up 2.6 percent from a year earlier in December, but rose at only a 1.4 percent annual rate in the last three months of the year, after rising at a 3.6 percent rate in the three months ending in June. One measure of inflation expectations, the spread between nominal five-year Treasuries and inflation-indexed bonds, has edged up recently but remains well below the levels of last summer. Recent readings from that indicator suggest 2.3 percent inflation going forward.

In sum, the economy is solid, with a firm labor market and signs that inflationary pressures are easing. The outlook for 2007 is for those trends to continue.