"The combination of rising interest rates and high gas prices are likely to be a major drag on the economy in 2006."

—James Gwartney
Stavros Center for the Advancement of Free Enterprise and Economic Education

FSU News

Few clouds mar otherwise bright economic outlook for 2006

by Jill Elish

The economic forecast for 2006 is mostly sunny, but there are a few clouds on the horizon, according to a Florida State University professor.

The economy is still strong after three years of expansion, but growth will begin to slow in 2006, said James Gwartney, the Gus A. Stavros Eminent Scholar Chair and director of the Stavros Center for the Advancement of Free Enterprise and Economic Education at FSU.

High gasoline prices and rising interest rates will contribute to sluggish growth next year, and neither of those problems can be easily fixed, Gwartney said. Neither increasing supply nor decreasing demand of gasoline can be done quickly, and any action that the Federal Reserve takes to lower short-term interest rates could actually increase inflation and, subsequently, long-term interest rates. An increased rate of inflation, which is already expected to be around 3 percent in 2006, would cause lenders to raise the long-term interest rates even more in order to cover their own increased costs, Gwartney explained.

"I would expect interest rates to inch up steadily during the first six months," he said, noting that rates will probably go up to about 7 percent in 2006. "That will make a big difference in sales of big ticket items like automobiles and housing. The combination of rising interest rates and high gas prices are likely to be a major drag on the economy in 2006."

The new year will have a bright beginning, however, thanks to above average holiday sales, an indication that consumers still have a good deal of confidence in the economy. Family incomes increased by about 2.5 percent in the past year, and the unemployment rate could dip below 5 percent in the coming year

The dark clouds of the hurricane season, which soaked up about 10 percent of the nation's disposable income during October and November, will have mostly blown over. Some people will continue to be hurt by expenses related to storm damage or dislocation and others may be suffering income losses because of the impact on tourism and other industries. But there will be a slight boost to the economy from the reconstruction, Gwartney said.

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