2006 economy looks solid

A fifth straight year of economic expansion in 2006 promises to mean new jobs, higher pay, and maybe even fatter investment portfolios for millions of Americans.

Despite a backdrop of challenges - notably signs of climate change in the nation's sizzling real estate market and investor jitters over bond rates - this forecast represents a strong consensus among economists.

There's no guarantee that the economy will actually match current expectations of 3.4 percent growth next year. But of more than 50 business economists surveyed by Blue Chip Economic Indicators, all but five see growth of 3 percent or higher. The lowest forecast is 2.6 percent. The upshot for those who work, shop, and invest would be a solid but not exciting environment.

"I think we'll see decent income growth and decent job growth," says Nariman Behravesh, chief economist at Global Insight in Lexington, Mass. "The average household will be better off, but moderately."

The consensus forecast calls for:

• Rising pay. Disposable incomes will rise by 3.2 percent, after inflation, more than double this year's gain.

• Costlier borrowing. Short-term interest rates (the three-month Treasury yield) will average 4.5 percent and longer-term rates (10-year Treasury) 4.9 percent, both small upticks from current levels.

• Moderate inflation. The consumer price index will rise 3.0 percent during 2006, down slightly from 2005.

• Healthy profits. Corporate earnings will grow 7.9 percent, but that's less than half the pace of 2005. That mixed picture, coupled with rising interest rates, has left Wall Street debating whether next year's stock market will head up or down.

• A strong job market. Unemployment to remain level at 5.0 percent. While job creation is not forecast in the Blue Chip survey, some experts call for job growth to reach 2 million for the year, higher than 2005 and much stronger than the early years of the current economic expansion.

"We're optimistic about the job picture for the next year," says John Challenger, who heads the outplacement firm Challenger, Gray & Christmas in Chicago.

Of course, these numbers are merely forecasts. But Randell Moore, editor of the Blue Chip Economic Indicators, says that when averaged together, the resulting consensus has been much more reliable over the years than any individual prediction. For example: "2005 is going to be very close to what the consensus was back in January," he says, despite the unforeseen spike in energy prices and major hurricanes that battered the Gulf Coast economy.

"I think people are pretty confident that we will not see the initiation of a recession in the United States in 2006," Mr. Moore says. "The odds are higher in 2007 or 2008. Much will depend on inflation and, as a consequence, what the Fed does."

The Federal Reserve has been pursuing a policy of pushing up short-term interest rates, toward what many economists see as a neutral level where the economy can grow without fueling inflation.

Depending on where inflation heads, the Fed may be nearing the end of its monetary tightening. Already, short-term rates are about equal to the yield on long-term Treasury bonds. Any "inversion," with short-term rates exceeding long-term rates, could signal that the Fed has overdone its job of inflation-fighting. As a result, economic growth could slow below its potential. On Tuesday, a brief inversion triggered a plunge in the stock market.

Concern about the Fed will be amplified when Ben Bernanke replaces Alan Greenspan as chairman in February.

Inflation and interest rates are just one of several risks economists see in the coming year. Other potential hazards to economic growth could include another surge in oil prices, a housing market that falls rather than flattens, and the possibility of some financial fiasco such as a major corporate bankruptcy.

Mr. Behravesh says it would take several major shocks, not just one, to send the global economy into a recession. For his part, he sees a soft landing for the housing market, rather than a plunge in home prices.

Indeed, forecasters generally stress the resilience of the US economy. Productivity has continued to rise, exports are growing, and businesses are investing in new equipment. All this bodes well for continued growth.