ANN ARBOR—With the dawning of the new millennium,
the booming American economy will continue to expand, but
at a somewhat slower rate over the next two years as the
Federal Reserve continues to pursue an anti-inflationary
monetary policy, say University of Michigan economists.

“It’s our view that the combination of a still-strong
U.S. economy, strengthening economies abroad, and the
gathering evidence that tight labor and tightening
materials markets are tipping the balance toward increasing
inflationary pressures imply that the Fed will have to
continue to tighten monetary policy,” says Saul H. Hymans,
U-M professor of economics.

“We’ve assumed that the Fed will increase the federal
funds rate a third time before this year ends and will
raise rates by another 50 basis points next spring—and
even that won’t be enough to allay the Fed’s concerns about
accelerating inflation if the economy stays as strong as
we’re expecting through 2001.”

In their annual two-year forecast of the U.S economy,
Hymans and colleagues Joan P. Crary and Janet C. Wolfe
predict that economic growth will slow from this year’s
rate of 3.8 percent to 3.1 percent next year and 2.9
percent in 2001.

“While the rate of output expansion is forecast to
moderate from the well-over-3.5-percent rates of this and
the previous three years, we believe that these growth
rates are about at the potential rate of expansion that
characterizes the current U.S. economy,” Hymans says.
activity abroad improving, and labor and materials costs
rising, inflation in consumer prices is expected to
increase from a rate of 1.6 percent this year to 2.1
percent next year and 2.4 percent in 2001, according to the
forecast.

The researchers say that the growth of household
purchasing power over the next two years will slow due to
the moderate output growth predicted and the increasing
rates of price inflation. Real disposable income is
expected to rise by 3.8 percent this year, 3.2 percent in
2000 and 2.4 percent in 2001.

While unemployment over the next two years will hold
steady at this year’s rate of 4.2 percent, interest rates
will continue to creep upward, thanks to the Fed’s
continued tightening of monetary policy, Hymans and
colleagues say.

The conventional mortgage rate is predicted to climb
from 7.5 percent this year to 8 percent next year and 8.1
percent in 2001. The rate for three-month Treasury bills
is forecast to rise from this year’s 4.6 percent to 5.4
percent in 2000 and 5.9 percent the year after, while 30-
year Treasury bonds rates are expected to increase from 5.9
percent in 1999 to 6.4 percent next year and 6.5 percent in
2001.

“With mortgage rates headed up, home building activity
is expected to slip in 2000, with housing starts forecast
to drop by about 100,000 units (from 1.65 million to 1.55
million),” Hymans says. “A further dip to 1.51 million
starts in 2001, though, still implies more home-building
activity in that year than in ’96 or ’97, which, at the
time, were the best years since 1988.”

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: year at 16.6 million units, before scaling back to a still-strong 16 million cars and light trucks in each of the next two years.percent this year, 6.3 percent in 2000 and 7.1 percent in 2001.

Sales of light vehicles will set a new record this
year at 16.6 million units, before scaling back to a still-
strong 16 million cars and light trucks in each of the next
two years.

Business capital spending will increase by 8.9
percent this year, 6.3 percent in 2000 and 7.1 percent in
2001.

The value of the dollar will fall by 3.8 percent next year and by 2.3 percent the year after.

The federal budget surplus will grow to $145 billion
in fiscal 2000, $194 billion in 2001 and $267 billion in
2002.