USA Heavyweight Economy
If a year and a half ago I had written in this column that interest rates would be increased 17 times from 1% to 5.25%, oil prices would increase to $80/barrel, Mr. Greenspan would retire, New Orleans and the Gulf Coast would be devastated by hurricanes and the war in Iraq would not be over, you would probably say we would be in a recession. Well, we’re not yet. However, the economy is slowing very quickly. Whether the U.S. economy goes into a recession is anyone’s guess.
Ed Seifried and I shared the podium in Fargo, ND, recently at a bankers meeting. The following are some highlights from our discussion.
Currently the short-term rate (90-day T-Bills) is 4.76% and the long-term rate (10-year bond) is 4.71%. This represents a slightly inverted yield curve. Based upon historical research this would indicate approximately a 30% chance of a recession in the next four quarters.
Economic growth has slowed to a 2.5% annual rate. This factor, along with reduced core inflation and a slowing housing market, would indicate that the Federal Reserve is near the end of its interest rate increases. Seifried’s economic models indicate that the federal funds rate next year at this time may be as low as 4.0%. This would equate to a prime rate of about 7.0%.
The Composite Leading Index is down 1.5% in the last 7 months, along with the inverted yield curve. This is another sign of a slowing economy.
Housing starts are weakening drastically, well below the ideal level of 1.75 million annually. The current level is 1.619 million. Building permits are at a four-year low along with the highest inventory of homes for sale in 15 years at 7.4 months. Housing has been the driver of the economy, creating the muscle for the heavyweight economy, so the next six months will be interesting.
The Road Warrior of Agriculture
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Editors' note: Dave Kohl, The Corn and Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups.
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