ANN ARBOR—Although U.S. economic growth has been brisk in recent years, expansion will be moderate through 2008, say University of Michigan economists.

“The past several years have seen the American economy expanding vigorously, generating jobs, reducing unemployment and, for the most part, keeping the overall price level under control,” said Saul Hymans, U-M professor emeritus of economics. “But a careful look at the details underlying the big picture shows that headwinds were developing even as the economy continued to generate positive macroeconomic outcomes.

“The conditions currently shaping the economy” including higher interest rates, higher oil prices and more inflation” are not likely to imply a highly expansionary trajectory. “

In their annual mid-year forecast of the U.S. economy, Hymans and colleagues Joan Crary and Janet Wolfe predict economic growth of 2.2 percent during the second half of this year and throughout 2007″ the weakest growth rate in five years. The economy will strengthen somewhat during 2008, posting a 2.7 percent rate of expansion, they say.

According to the forecast, payroll job gains will slip from 1.8 million jobs in 2006 to 1.3 million in 2007. Even though job gains will start to pick up in 2008, on a calendar-year basis, the economy will add just 1.1 million jobs that year.

Unemployment will average 4.9 percent over the next two years, up slightly from this year’s 4.7 percent, but still below last year’s 5.1 percent, the economists say.

Despite upward pressure on prices this year, inflation will be held in check over the next two years, they say. The all-items Consumer Price Index will move down from this year’s 3.7 percent to 3.1 percent next year and 2.7 percent in 2008.

With inflation expected to be contained, Hymans and colleagues believe the Federal Reserve Board will hold interest rates fairly steady over the next two years” after raising the federal funds rate by 25 basis points 17 straight times.

“If economic prospects develop about as we anticipate, the current level of the fed funds rate (5.25 percent) will” possible small deviations aside” last right through the 2008 forecast horizon,” Hymans said. “The economic slowdown is not expected to deteriorate to the point where the Fed has to reverse course and lower interest rates significantly. Nor in our judgment, will a likely firming of the expansion combine with sufficiently risky inflationary prospects to induce the Fed to push short-term interest rates significantly above current levels. “

Still, this leaves room for mortgage rates to continue upward, the forecast shows. It calls for the 30-year conventional mortgage rate to increase from an average of 6.6 percent this year” the highest rate in four years” to 7 percent next year and 7.4 percent in 2008.

In addition, the rate for three-month Treasury bills is expected to jump from last year’s 3.1 percent to 4.8 percent this year and hold steady at 4.9 percent over the next two years. The 10-year Treasury bond rate, which was 4.3 percent last year, will rise to 5.1 percent this year, 5.7 percent in 2007 and 6 percent the year after.

The U-M forecast, which is 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:

Oil prices will retreat from recent peak levels, but remain relatively high through 2008, falling from an average of $75 per barrel in the current quarter to $70 in early 2007 and $66 by the end of 2008.

Private housing starts will fall from last year’s 2.07 million units, the most since 1972, to 1.9 million this year, 1.68 million in 2007 and 1.63 million the year after.

Existing home sales, which set a new record at 6.17 million homes in 2005, will drop to 5.77 million in 2006, 5.36 million next year and 5.27 million in 2008.

Sales of light vehicles will edge down from last year’s 16.9 million units to 16.7 million this year and then improve slightly to 16.8 million in both 2007 and 2008.

Related Link:

• U-M’s national economic forecast and RSQE