U.S. Economy Solid, But Some Signs Are Worrisome Despite rising energy prices and sinking real estate prices, the stock market had a strong year in 2006 and the overall economy turned in a solid performance.
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U.S. Economy Solid, But Some Signs Are Worrisome

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U.S. Economy Solid, But Some Signs Are Worrisome

U.S. Economy Solid, But Some Signs Are Worrisome

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RENEE MONTAGNE, host:

Our business news starts with Wall Street's last trading day of the year. The Dow Jones Industrial Average starts the day up more than 1,700 point since the beginning of the year. Major stock indices fell slightly in yesterday's trading despite reports showing the economy is more robust than previously thought.

Stock exchanges will close for the New Year holiday. The NASDAQ will remain closed Tuesday in honor of the funeral of former President Gerald Ford.

Economists were fretting earlier this year about a drop in housing sales, a surge in energy prices and slowing economic growth. But they're not shedding so many tears now, as NPR's Jim Zarroli reports.

JIM ZARROLI: If nothing else, 2006 will be remembered as the year when the stock market regained its mojo, when the Dow Jones Industrial Average finally broke out of its post-9/11 stupor and began setting records again. On Wall Street these days, there is optimism to spare.

Mr. DONALD MARRON (Lightyear Capital): Basically the economy is in solid shape.

ZARROLI: That's Donald Marron, the former chairman and CEO of Payne Webber, who now runs a private equity fund called Lightyear Capital. Marron has some big concerns about certain systemic problems in the U.S. economy. He talks about rising wage inequality, for instance.

But Marron says if you go out right now and talk to businesses, you hear a lot of positive news. Profits are strong, business is good.

Mr. MARRON: When you look at it from that point of view - and I've talked to a number of CEOs and people doing that - things look okay.

ZARROLI: Economist James Glassman of JPMorgan Chase agrees. Glassman says the economy has had some tough breaks this year. Energy prices rose, and though they've since fallen back, they're still high. The Federal Reserve has been raising interest rates, and above all, the housing market is suffering badly, especially in some once overheated markets like southern Florida and Nevada.

And yet, Glassman says, most of the cylinders in the United States economy are still firing.

Mr. JAMES GLASSMAN (Economist, JPMorgan Chase): Corporate profits are at record levels. I mean if you look away from the building business, there are just a lot of reasons to believe that we're on a good track.

ZARROLI: Glassman says one reason for optimism is that the Federal Reserve has apparently achieved what's called a soft landing. In other words, by steadily raising interest rates, it's managed to slow down growth just enough to contain inflation without causing a recession. As a result, the Fed was able to stop raising interest rates over the summer and to leave rates where they are since then.

Mr. GLASSMAN: Back in the spring everyone was talking about stagflation - lower growth, more inflation. Now because of what's been happening - lower inflation - people are more optimistic about what could happen next year in growth and so the equity market's responding to that.

ZARROLI: And yet not everyone is so positive. Nouriel Rubini is a professor of economics at New York University. He's been decidedly bearish about where the economy is going.

Professor NOURIEL RUBINI (New York University): That was one of the earlier suggestions, there is a recession next year. But many more now are worried about it, I would say.

ZARROLI: Rubini says the residential housing business is in a deep downturn. Energy prices have come down since the summer. But he says oil is still selling for about $60 a barrel and that makes doing business more expensive. Rubini is especially worried about consumers. He says many consumers are tapped out and heavily in debt. The rise in interest rates make some kinds of credit, like home equity loans, more expensive, which will only worsen consumer's plate.

Prof. RUBINI: I see it as a tipping point of consumer burnout that could lead to this hard landing.

ZARROLI: Meanwhile, he says, real wages haven't been growing very much in recent years, and the labor market was soft in 2006. Although unemployment was low, the number of jobs created each months was less than spectacular.

One other unknown right now is the weaker dollar. It's lost substantial ground this year, especially against European currencies. That makes it more expensive for Americans to buy imported goods, which can add to inflation pressure. But it's also good for exporters because it makes U.S. goods more attractive overseas. Like so much else about the economy this year, the impact of a weaker dollar could go either way.

Jim Zarroli, NPR News, New York.

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