The U.S. economy will maintain moderate growth through 1998.

ANN ARBOR—Despite a rise in short-term interest rates, the national economy will continue to show solid growth through the middle of this year before scaling back to a moderate pace through next year, say University of Michigan economists.

In their annual forecast update of the U.S. economy, Prof. Saul H. Hymans and researchers Joan P. Crary and Janet C. Wolfe of the U-M Department of Economics predict that the economy will expand 2.8 percent during 1997, then slow to a 2.1 percent growth rate in 1998.

Unemployment is expected to slip to a steady 5.2 percent through next year and inflation is forecast to remain in check, with consumer prices rising 1.7 percent this year and 2.2 percent in 1998, the researchers say.

However, Hymans and colleagues believe that the Federal Reserve Board will tighten monetary policy somewhat to “take a little of the steam out of the expansion.”

“We do not expect the Fed to be comfortable with the current degree of strength in the economy, even in the absence of any clear indications of an acceleration in inflation,” Hymans says. “Thus, we are assuming that the Fed will push short-term interest rates up this spring by enough to rein in the current momentum in the economy.”

Through the end of next year, interest rates are expected to rise slightly from their 1996 levels, with conventional mortgage rates hovering around 8 percent, the 30-year Treasury bond rate yielding about 7 percent and the 3-month Treasury bill rate measuring about 5.4 percent.

The federal funds and discount rates will be 50 basis points higher from mid-1997 to the middle of next year, before dropping back to their current levels of 5.25 percent and 5 percent, respectively, in late 1998.

“By then, the economy will be expanding at a rate below 2 percent, unemployment will be edging up and the bond market should be a good deal less concerned about the inflation monster,” Hymans says. “A somewhat more supportive monetary policy should then be acceptable, as well as useful.”

The U-M forecast, based on the Michigan Quarterly Econometric Model of the U.S. Economy and compiled by the U-M Research Seminar in Quantitative Economics, also predicts that:

–Private housing starts will slip from 1.46 million in 1996 to 1.34 million in 1997 and then hold flat at 1.35 million next year.

–Light vehicle sales will settle in at a 15.2 million-unit pace throughout 1997 and 1998, up from sales of 15 million last year.

–Business capital spending will slow from a growth rate of 9.5 percent in 1996 to 5.9 percent this year and 4.6 percent in 1998.

–Federal expenditures, which increased 3.3 percent in fiscal year 1996, will increase 3.9 percent in fiscal 1997 and 3.3 percent in fiscal 1998.

–Federal revenues, which rose 5.8 percent in fiscal year 1996, will increase 6.5 percent in fiscal 1997, but only 2.7 percent in fiscal 1998, thanks to projected personal tax cuts.

–The fiscal year 1996 federal government deficit of $139 billion will decrease to $105 billion in fiscal 1997, before worsening to $118 billion in fiscal 1998—again, thanks to tax cuts.

Research Seminar in Quantitative EconomicsU-M News and Information ServicesUniversity of Michigan