The transition to new leadership at the Federal Reserve Board, in the person of Fed Chairman Ben Bernanke, appears successful. The Fed extended the pause in its series of interest rate upticks by holding rates steady in December. Although the statement accompanying the decision indicated lingering concern over inflation, the drop in oil and gasoline prices in the autumn helped keep overall price indices in check.
Consumer prices were reported by the Labor Department to be flat in November. The cost of housing was up that month, despite the recent weakness in the housing market. Employment remains strong, and, in fact, labor costs remain as a possible inflationary cloud over the economy.
Overall economic growth slowed to a sustainable 2.2% level in the third quarter. Although an increase in interest rates in 2007 can’t be ruled out, especially if we get an unexpected external shock to the economy, many observers have suggested that the Fed’s more likely next move is a rate cut, rather than an increase. Still, such a cut could be delayed until the second half of 2007.
Equities
The Dow Jones Industrial Average touched new highs as the fourth quarter began and established a new top of 12,510.57 on December 27. The Nasdaq composite index reached levels not seen since 2001, though it remained well off the peaks associated with the Internet bubble. The S&P 500 was up 13.6% for the year.
Is a fifth year of stock market gains probable? Yes, say experts in the business press. The consensus forecast of nine market strategists polled by Barron’s magazine in December, for example, called for an 8% advance in the S&P this year. Stocks are not overvalued by historical standards, and price/earnings ratios remain in reasonable territory. Profits have been doing well, and companies have plenty of cash to work with. If inflation remains in check, and interest rates don’t rise, the steady growth of the second half of 2006 could continue through 2007, leading to higher share prices.
Taxes, past and future
The fiscal year that ended September 30, 2006, had some bright spots for the federal government, according to an analysis released in December by the Treasury Department and the Office of Management and Budget. A strong economy leads to growth in tax receipts, and that was proved last year. Among the findings:
The bad news in the report was a sobering 10% increase in the projected net shortfall over the next 75 years in funding for social insurance programs, including Social Security and Medicare. We’ll need to come up with an additional $44.4 trillion, according to the report.
As the Democrats take over leadership of the tax-writing committees in Congress, priorities are expected to change.
Permanent relief may be on the way for those afflicted by the Alternative Minimum Tax, or AMT. Because the basic AMT exempt amount never has been indexed for inflation, it increasingly now falls upon the merely affluent. A two-earner family with kids that lives in a state with relatively high property values and high state taxes very likely is intimately familiar with the AMT. That describes the constituents of a great many Democratic Senators and Representatives.
© 2007 M.A. Co. All rights reserved.
