Look for State’s Economy to Grow a Bit Next Year, With an Inflation Rate Near 2.6 Percent

The coming year looks to be a good one for the state’s economy, according to analysts at the Center for Business and Economic Research at The University of Alabama.

“We think the Alabama gross state product will rise 3.2 percent in 2006 after growing 3.4 percent in 2005,” said Ahmad Ijaz, an economic analyst at the Center.

If there is an upside to hurricane-heavy 2005, it’s that an expected cutback in consumer spending will be offset by strong growth in capital spending, including hurricane-related construction activities.

The Federal Reserve Bank will raise the fed funds rate to 4.75 by March and pause after that, Ijaz predicts. “The Fed has raised the rate at every one of its meetings from 1.25 percent in June 2004 to 4.0 percent in November 2005,” he said.

As long term interest rates continue to climb, housing markets will slow in 2006, with sales of both existing and new homes declining from their 2005 levels. Mortgage lending is already shrinking in some major markets in the nation and will get tighter in 2006.

Long term interest rates will continue rising in 2006, says Sam Addy, associate research director at CBER. “The 10-year Treasury note, currently around 4.5 percent, will be above 5.0 percent in 2006,” Addy says, “and the 30-year conventional mortgage rate will increase from 5.9 percent in 2005 to 6.8 percent in 2006.”

Things will be a little more expensive, as inflation, as measured by consumer prices, will be around 2.6 percent in 2006, following a 3.4 percent rate in 2005. Gas tanks may not cost as much to fill, as oil prices will fall slightly in 2006, from an average of $57 per barrel in 2005 to about $55 per barrel in 2006.

The state added about 30,000 new jobs in 2005 and will add close to that number – 26,000 — in 2006. Most of these jobs will be in service related firms, particularly in professional and business services and health care related services. Most new manufacturing jobs will be added in automotive production and related industries.