Review of 2006 offers few hints for coming year | VailDaily.com
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Review of 2006 offers few hints for coming year

William A. DesPortes

As 2006 comes to an end, lets take a minute to review the status of the economy and interest rates. It should first be noted that we began the year with a new Federal Reserve Board chairman. At the end of 2005, Ben Bernanke took over for Alan Greenspan who held the office for more than 18 years. In accordance with his predecessor, Chairman Bernanke and the Federal Reserve Board continued to fight inflationary pressures in the economy by raising the short-term interest rates (the federal funds rate) during the first half of the year to 5.25 percent. The federal funds rate is the tool used by the Federal Reserve Board to make money more or less readily available. This action heats or cools the economy and, in theory, inflation. The current rate of 5.25 percent has been stable since June 29. With the fed funds rate stabilized and unchanged for the time being, our national economy and consumers have been able to perform without the looming influence of rate increases.After short-term interest rates, jobs, unemployment and wages are probably most important in the equation. After all, consumers with jobs and incomes make the economic wheel go round. Unemployment remains at record lows of 4.5 percent (as reported on Dec. 8), and jobs continue to be steadily added to the economy, averaging 149,000 per month for the last year. Wages have also grown at an increase of 4.1 percent over the past 12 months. Overall, the employment figures have been solid and reassuring that the economy is on good overall condition. As discussed in my column published Dec. 17, wage-based inflation does loom as a potential damper on our economic prosperity. Following short-term lending rates and the employment status, inflation should be considered the next major factor in determining the status of our economy. There are many reports that economists and the Federal Reserve Board use to measure inflationary pressures in the economy, but two notable reports are the Consumer Price Index (CPI) and consumer spending reported in the Personal Consumption Expenditures Report (PCE).The Consumer Price Index measures the cost of goods and services paid by the average consumer for a fixed basket of goods and services (sample price of goods and services taken at random), excluding food and energy. Year to date, the CPI (inflationary level) was at a 12-month level of 2.2 percent and actually down .1 percent for November 2006. Inflationary levels of 2.2 percent are more or less within the Federal Reserve Boards acceptance level.Personal spending measures how much the average household spends on a monthly basis. The PCE report was up .5 percent for the month of November 2006; however, analysts had forecasted a .6 percent increase. This does indicate a bit of a slowdown in spending. It is also worth looking at the Gross Domestic Product report (GDP). The GDP measures the output of goods and services produced by labor and property located in the United States. Basically, it reveals the pace at which our economy is growing. The Gross Domestic Product grew at a pace of 5.7 percent in the first quarter of 2006, 2.6 percent in the second quarter and 2 percent in the third quarter. These numbers obviously represent a slowdown in the nations growth.As far as interest rates on mortgages, there are so many variables that go into determining an interest rate, it is hard to articulate where mortgage rates are.” Generally speaking, mortgage rates are about the same as where they were a year ago.So, what do all of these numbers and reports have to do with the direction of our economy? Well, a review of the economy indicates that short-term interest rates have been stable for six months, unemployment is low, wages are increasing, jobs are being added to the economy, inflation is more or less in check, consumer spending has dropped slightly, and the output of the our nations economy is slowing. What does that mean? It means that there are mixed signals as to the direction of the economy right now. Every report that continues to come out in 2007 will influence short-term and long-term interest rates. If you have any financing plans at any time during 2007, be sure you are working and communicating with a professional who can advise you when and why to take advantage of an opportunity. And stay tuned to future articles for continued insight as to which way the pendulum will swing. William A. DesPortes is a managing member of DesPortes, Selig & Associates, Professional Mortgage Services. He can be reached at 970-949-0653 or wdesportes@qwest.netVail, Colorado


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