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Alex and Dave's Economic "Fore-guess"

Farm Business Management Update, August/September 2006

By Alex White (, Instructor, Agricultural Finance and Small Business, and David M. Kohl (, Professor Emeritus, Department of Agricultural and Applied Economics, Virginia Tech.

What kind of a story we can tell about the U.S. economy? Before we go too far, be forewarned that it may not be the happiest story ever told. To be honest, we’re a little concerned about the state of the economy over the next 6 to 9 months. We’ve broken the main indicators into 3 groups – the Good, the Bad, and the Ugly.

The Good

Purchasing Managers Index is still strong at 54.7 but lower than its recent high of 57.3 (April 2006).

U.S. unemployment rate is decreasing, from 4.8% in February to 4.6% in June

The Bad

CPI is increasing at an annual rate of 4.3%

Capacity Utilization Rate is increasing, up to 82.4% from 80.9% in January

Gold prices are increasing, from $570/oz. in January to $634/oz. in June

U.S. T-Bill yields are starting to fall

The Ugly

Higher oil prices

Core Inflation Index is creeping up – from 2.1% in January to 2.6% in June

The yield curve is flattening out even more

So what does this mean to us?

We can expect the Fed to continue to raise interest rates to try to rein in these inflationary pressures. What outcomes are we seeing?

The Prime Interest Rate is creeping up

Housing starts are decreasing

30-year mortgage rates are decreasing

Some indications suggest that a recession is not out of the question. Regardless, this is a time to be more defensive in your spending and purchasing – time to start monitoring your household budget more closely, think about postponing some big-ticket purchases, and start to build up your savings accounts. “But Alex,” you say, “if everyone begins to reduce their spending the economy will start to slow down – you are adding to the probability of a recession by recommending a defensive position!” My point is that if you are facing a cash flow problem, now is the time to get control of your spending and build your liquidity (savings accounts).

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