The US labour market will remain tight next year, the White House predicted Tuesday, raising hopes that ordinary Americans will start to feel more of the benefits of the country’s economic expansion.
Issuing its twice-yearly economic forecasts, White House economic advisors said unemployment would average about 4.6 per cent in 2007, only a slight bit higher than the present 4.4 per cent.
Jobs growth would average about 129,000 a month - fewer than anticipated in June, but enough to keep unemployment low due to the falling number of people joining the labour market.
Ed Lazear, the chairman of the council of economic advisors, said, “I would anticipate that we will have positive and strongly positive real wage growth in the next year.”
The White House forecasts came as Kevin Warsh, a governor of the Federal Reserve, warned that inflation remains “uncomfortably elevated” in spite of the recent deceleration in core inflation.
Mr Warsh said financial market prices suggested that inflation would decline slowly, but added, “There remain, I believe, clear upside risks to that outlook.”
After growing slowly for much of the economic cycle, real average hourly wages for non-supervisory workers are up 2.8 per cent year-to-date, taking into account the benefit of the sudden drop in energy prices.
Mr Lazear said Tuesday that providing energy prices now stabilise, real wages will grow strongly into 2007. Critics, though, say the most recent gains are a one-off result of lower oil prices, and will not be sustained.
The White House cut its forecast for economic growth this year, next year and in 2008. Mr Lazear blamed the reduction on a sharper-than-expected correction in the housing market.
However, he said there were few signs that the slowdown in housing was spilling over into the rest of the economy, citing robust figures for consumption and retail spending.
The sharpness of the retrenchment in housing so far could point to a better than expected recovery ahead, he said.
Mr Lazear declined to speculate as to whether the housing market would bottom out this quarter or next, but said he thought growth in the fourth quarter would be stronger than in the third.
The White House raised its estimate for inflation next year, to 2.6 per cent from 2.4 per cent as measured by the consumer price index.
Mr Lazear played down the significance of this increase, highlighting recent favourable readings of headline, core and producer price inflation.
Nonetheless, if the forecast combination of higher than earlier anticipated inflation, plus a stronger than earlier expected jobs market were to materialise, it is hard to see the Federal Reserve in vigorous interest rate-cutting mode next year.