[For the U-M forecast on the Michigan economy, click here.]

ANN ARBOR— While the U.S. economy will continue to expand at a moderate rate over the next two years, unemployment is expected to increase slightly through 1998, say University of Michigan economists.

In their U.S. economic forecast for 1997-98, Prof. Saul H. Hymans and researchers Joan P. Crary and Janet C. Wolfe of the U- M Department of Economics predict that the gross domestic product 1997 and 1998″ remaining essentially unchanged from the 1996 rate.

However, due to greater projected growth in labor productivity” from the ” sub-par” 0.6 percent rate of 1995-96 to a 1.7 percent rate for the next two years” unemployment is expected to edge upward from the current rate of 5.2 percent to about 5.4 percent by the end of 1998, they say.

While Hymans and colleagues forecast moderate growth for the economy overall, inflation, they say, will remain well-contained but will move upward from the very low rates of 1996. Consumer prices are expected to rise by 2 percent in 1997 and by 2.4 percent in 1998, due to a somewhat higher rate of inflation in service prices” especially those of medical care services, which have been particularly restrained in the past several years.

According to the researchers, real disposable income” household purchasing power” will post a gain of 3.1 percent in 1997, about the same as this year and just under the 3.5 percent increase in 1995.

In comparing this with the average of 2.8 percent per year during the past 25 years, Hymans says that if their forecast is accurate, ” this will mean three straight years of above-average growth in purchasing power, which hasn’t happened since the recovery from the 1981-82 recession produced a three-year period of above-average growth in 1984-86.”

Finally, the U-M economists predict that both long-term and short-term interest rates will remain fairly stable over the next two years, with conventional mortgage rates hovering around 7.8 percent, the 30-year Treasury bond rate yielding about 6.5 percent, and the 3-month Treasury bill rate holding steady at about 5 percent.

The 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 projects that: