Wells Fargo Economists Optimistic about 2007 Economic Growth

Despite the current economic slowdown, Federal Reserve interest-rate increases, home price declines, higher oil prices, and the war in Iraq, Wells Fargo’s senior economists forecast U.S. economic growth in 2007.

“The [stock] market’s recession fears are overblown and the U.S. economy will reveal incredible resilience in 2007,” said Dr. Scott Anderson, senior economist for Wells Fargo & Company, during the company’s annual economic forecast teleconference. A Webcast of the call is available through Jan. 13, 2007.

“The drivers that had been pulling down the U.S. consumer and economy in the first half of 2006—such as rising energy prices and interest rates, sluggish wage growth, and a sharp drop in housing demand—began to recede or stabilize in the second half of 2006.”

“We’ve still got fiscal juice,” said Dr. Jim Paulsen, chief investment strategist of Wells Capital Management. “We’ve had mortgage rates come back down in the last half of the year. We’ve had gas prices come down. Liquidity is growing over 9 percent year over year. We have a weaker dollar. All of that is juice for growth next year.”

“The decline in home prices hasn’t yet resulted in a decrease in consumer confidence and spending, or a general decline of household wealth and it’s unlikely to occur next year,” Anderson said. “The housing slowdown has been offset by strong stock market wealth, so household wealth continues to grow.”

Inflation and gross domestic product growth

Gross domestic product growth is expected to rebound as soon as next quarter. Paulsen said he predicts a 3.5 percent growth rate for 2007 based on his expectation that the housing and auto markets will flatten out. Anderson said growth will accelerate in early 2007, reaching an annualized quarterly growth rate of about 2.8 percent, from recent annualized quarterly rates of around 2.0 percent.

“Lowering interest rates under current conditions is like throwing more fuel to an already burning fire. What the Fed needs to do today is encourage U.S. consumers and the government to save, not consume,” said Wells Fargo senior economist Dr. Eugenio Aleman.

Labor market

“New legislation on minimum wage could put pressures on the cost of labor, adding to the already serious concerns on the labor market,” Aleman said. “The strong movement against immigration could further complicate prospects for some industries that have thrived under the ‘no intervention’ policy by federal authorities.”

“Job growth appears steady outside the weakening auto and housing sectors,” Anderson said, “and payroll growth over the past year rose substantially, suggesting a healthy and tighter labor market.”

He said that continued job growth and improved real wage gains will help consumer spending withstand the lagged effects from Fed rate hikes, high debt-service burdens and energy prices.

Energy

The war in Iraq is still unpredictable and many forces could put more pressure on the price of petroleum. “Commodity markets are going to go higher next year with a weaker dollar,” Paulsen said, “but oil is still overpriced in relation to other commodities.”

Consumer spending

Anderson said there are tentative signs that consumer spending and housing demand is responding to the improved financial picture. He forecasts a 3 percent growth rate in consumer spending next year, down from 3.1 percent in 2006. Besides higher real wage growth, drop in energy prices, and easing of financing costs, Anderson said he sees little prospect for major wealth loss in average households.

Some economists have said home price declines could to lead to a general decline in household wealth that would put a crimp in consumer confidence and spending, but Anderson said that level of lost wealth has not yet occurred and is unlikely to occur next year.

Housing market

Anderson said most of the damage in the housing market already has occurred and there are signs of recovery—mortgage purchases are up about 15 percent since the beginning of November. Existing home inventories have plateaued over the last four months, and the Wells Fargo National Association of Home Builders index has held above its September low for three consecutive months with builders reporting an improved sales outlook.

Investments

Paulsen predicts next year will be another good one for the stock market—with stock prices likely rising. He also sees good profit trends, investment liquidity and expects that long-term Treasury yields will remain at 40-year lows.

Global economy

The economists agreed that the U.S. dollar’s steady depreciation against the country’s major trading partners will become an important theme for next year.

“Strong growth in China and India are contributing to downward pressure on many goods, however, at the same time, the entrance of these countries’ large populations to the mainstream consumer market are helping push commodity and petroleum prices up. Thus, the net effect on global inflation is still uncertain,” Aleman said.

Wells Fargo’s Economists offer their economic analysis at: www.wellsfargo.com/com/research/economics/ and www.wellsfargo.com/com/research/investments/.

Note: Comments by Wells Fargo’s economists during the teleconference are their own opinions and should be attributed to them as individuals, not to Wells Fargo & Company.