Economic Predictions for 2006

This is a partial transcript of "Special Report With Brit Hume" from Dec. 27, 2005, that has been edited for clarity.

JIM ANGLE, GUEST HOST: Many of you were apparently generous this holiday season and that is part of some of the positive news for the economy as we head into 2006. Another report suggests the job market looks good as well. For a peek at the crystal ball on our economic futures, we turn to Tim Kane, an economist at the Heritage Foundation. Tim, thanks for joining us.


ANGLE: Let me ask you first, before we get into some of the details on where we are on in the economy, let me ask you a broader question. You believe that 2005 is one of the best five years out of the last 25. Now what brings you to that conclusion?

KANE: Well, I got a little frustrated with seeing all the negativity in some of the reports, and among friends and it just inspired me as an economist to go look at the big aggregates that we look at, GDP, inflation, unemployment, and compare where we were this year with history.

And historically, this is one of the best five years. I mean, you put all these numbers together, you create a macro index. Things are really good right now. They’re certainly better than average. Volatility has gone down as well. So that means, for the last few years, even during the recession, it just wasn’t much of a recession.

The perceptions though are very negative, and maybe that indicates that as Americans we’ve gotten used to this prosperity and we expect really fast, high growth rates. If they’re not the best in the world, then we get upset with it. But we shouldn’t be. We should be really proud of the strong economy we have.

ANGLE: OK, we’re just on the backside of the holiday shopping season. And there are a couple of predictions about where we are against last year. One group associated with MasterCard said holiday spending’s running about, a little more than eight percent beyond where it was last year. The National Retail Federation expects about a four and a half percent gain. Either way, it’s a pretty healthy gain. What do you make of that and what does holiday spending do for the economy overall?

KANE: Well, consumer confidence took a dip, but it definitely grew again and that’s reflected in these holiday numbers. They’re higher than last year, four percent, eight percent, 8.7, I think was the MasterCard number. That’s great news.

But I’d like to downplay consumption numbers. I think they tend to be overemphasized. They really reflect the fact that people have more wealth, they have more prosperity to spend. That comes from the supply side of the economy. America has got the most productive workers in the world. Why is that? And we need to focus a little bit more and appreciate that that’s where the growth is rooted, it’s because we have a productive economy.

ANGLE: Now a lot of people don’t understand productivity. That is how much we all produce per hour. And an increasing lifestyle and a better economy comes from producing more in the same amount of time.

KANE: Right. More output per worker, per worker hour, however you measure it. America really sets the standard for the world. And it’s a bit like magic dust. It keeps growing. We’re at the technology frontier and yet out innovators and scientists and entrepreneurs, they keep coming up with more stuff, newer, better. And you look at what was purchased this year, it was the iPods, it was a lot of the things that embed new technology.

But what’s fascinating with this is, it spreads across sectors. The productivity boom over the last 10 years has outpaced the previous 35. But it goes into manufacturing and retail, so it’s everywhere.

ANGLE: So you mean, when people aren’t listening to their iPods, the equipment they use to actually work is making them more productive?

KANE: That’s one way to think about it. I’m an optimist in all things. I think those iPods make us a little smarter, too.

ANGLE: Now, one of the other things that we see here at the end of year, predictions for job growth during 2006. There were a couple of surveys that have come out and I want to show you those.

You can see them here on the screen. You see here, 33 percent in one survey of large corporations plan to increase hiring in the next six months. And 66 percent, another survey of small and medium-sized companies shows they plan to add employees in 2006. That would suggest on the face of it that the job outlook is pretty strong.

KANE: Absolutely. In fact, if you remember, two months ago where there were job losses in America and everybody was in a flurry about that, the Labor Department went back and revised those. There have been no job losses during any month during the last year, especially with this most recent data where there were over 20,000 jobs created.

The fact is, the trends are likely to continue. We’re likely to see very strong job growth. But what’s good about this is we’re starting to see it at all levels. So the small employers, the medium-size employers, the big employers. They’re all hiring, that means higher consumption.

ANGLE: Now most jobs come from medium and small-sized employers.

KANE: Most of the churn, most of the job accretion comes. A lot of the job losses come at that smaller level, too. So yes, don’t get distracted when you see a company lopping off 10,000 workers. They’re the little Google’s and the Microsoft’s that will grow up to be the giants of tomorrow.

ANGLE: Now, if it’s true, though, that you need about 150,000 jobs a month just to stay even with population growth?

KANE: That was true. A new Federal Reserve study from Atlanta found that with demographic changes, with so many boomers leaving the workforce, we only need about 100,000.

ANGLE: Really?

KANE: So anytime you see a job number that’s higher than 100,000, that’s actually net gain.

ANGLE: That’s all to the good?

KANE: That’s all to the good, keeping up with population.

ANGLE: Now, one of the most remarkable things about the last year is we’ve had a couple of pretty serious hits. We’ve got a minute left. We had hurricanes, and an enormous amount of damage, although a lot of federal spending too.

And we’ve had all sorts of problems because of energy prices, which took a lot of money that people would have otherwise spent elsewhere. How did we weather those two kinds of blows to the economy and come out as well as we have?

KANE: How did we? I think if you took any economist from 10 years ago and put him here today, and he hadn’t seen the technology room we’ve just went through, he wouldn’t believe it. So we have a more dynamic, flexible economy. It basically means it’s easier for companies to route around a major port like New Orleans. The supply chain is just so much more efficient.

ANGLE: The economy is much more efficient that it can just work itself around these things?

KANE: That’s right. The computers that now help us reroute logistically have not made us recession-proof, but increased our strength quite a bit.

ANGLE: Tim Kane, thanks very much, appreciate your help.

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