Swonk Releases Annual Outlook Edition

"The expansion officially celebrated its fifth birthday in November and, almost on cue, slowed ... dramatically. Real GDP growth moved from a red-hot 5.6% pace in the first quarter to less than to 2% in the current quarter. This should come as no surprise as we were warned a year ago that the economy would slow down," says Diane Swonk, chief economist of Mesirow Financial, in her annual holiday edition of Themes on the Economy.

"The slow down, however, did shock many bond traders, who flip flopped between fears of overheating at the start of the year and concerns of recession by the end of the year. The primary causes for the concern are housing and autos, which were both pillars of strength until recently. So far, however, the correction in both industries has been fairly well-contained -- somewhat offset by gains elsewhere," notes Swonk.

In her December newsletter, Swonk provides her forecast for economic growth in 2007 and outlook for financial markets:

1. Consumer spending is expected to hold in the 3% range, about the same as 2006, but a sharp slowdown from its pace earlier in the expansion.

2. Declines in residential investment are expected to dissipate as builders work hard to clear unwanted inventories with sweetened financing deals and free upgrades.

3. Inventories are expected to stabilize once the auto industry gets its inventories more in line with reduced sales expectations at the start of 2007.

4. Government spending is forecast to rise at roughly the same pace as we saw in 2006.

5. The trade deficit is expected to improve.

6. The Fed is expected to remain on hold as it waits for inflation to abate in the face of an extended slowdown.

7. Long-term bond yields are expected to rise slightly, as demand from abroad wanes slightly, but not enough to exceed short-term yields.

8. Profit growth is forecast to drop back into the single-digit range.

9. The dollar is expected to stabilize after depreciating sharply at the end of 2006.

"Businesses continue to be conservative in their investment outlays, especially when it comes to upgrading their equipment. Some blame the computer industry and its lack of innovation in recent years. Others worry that the pressure to deliver near-term profits has stopped CEOs from making long-term bets. No matter the cause, the result is pent-up demand and a need to catch up on earlier losses. This could result in stronger-than-expected business investment, especially if oil prices stabilize, which would add to the certainty of making investments in 2007," concludes Swonk.

Mesirow Financial is a diversified financial services firm headquartered in Chicago. Founded in 1937, we are an independent employee-owned firm with nearly $30 billion in assets under management, advisory and custody, and more than 1,100 employees in locations across the country and in Puerto Rico. With expertise in Investment Management, Investment Services, Insurance Services, Investment Banking, Consulting and Real Estate, Mesirow Financial has consistently met the financial needs of investing institutions, public sector entities, corporations and individuals.

SOURCE Mesirow Financial