The economy in the United States will expand by 3.8 percent in 2006, the third consecutive year of above-average growth in the 3.5 percent to 4 percent range. Manufacturers, contractors and their distributors also will have more pricing power in 2006, said Jim Haughey, director of economics for Reed Research Group.

The long economic expansion is progressively absorbing the unused labor and unused factory capacity created in the 2001–02 recession, he continued. At the beginning of 2006, the unemployment rate will be slightly under 5 percent, and the capacity utilization rate at manufacturing plants will be slightly more than 80 percent.

"This is the threshold for a more rapid rise in inflation, and, as a result, credit costs," said Haughey. "It is also the kickoff to a period of strong investment in both manufacturing and in non-residential buildings and structures."

The last part of 2005 had softer economic growth, primarily due to weak auto sales after the summers' aggressive discounting; the nearly 250,000 people out of work due to the hurricanes; and the shock to consumer spending when fuel prices soared in September.

But all these negatives are temporary, asserted Haughey.

"Gasoline pump prices fell by a third from early September to early December, and the Consumer Confidence Index was nearly back to the pre-hurricane level by Thanksgiving," said Haughey. Because of these factors, economic growth will bounce back to 4 percent-plus in the first half of '06, before the impact of slightly higher credit rates slows economic growth to about 3.5 percent in the second half of the year.

The expected rise in inflation and credit rates is small from a historical perspective. Excluding energy and food, the pace has increased from -1 percent several years ago, to 1 percent to 1.5 percent by the end of 2005. It will rise further, to 2 percent to 2.5 percent by the end of 2006.

The largest price increases are expected in cement, gypsum, non-ferrous metals, petrochemicals and plastics (10 percent plus), and in truck freight rates (6 percent to 7 percent), said Haughey. And while averaging far higher in 2006 than '05, energy prices are expected to be steady to slightly declining over the course of 2006.

At the Reed Construction Data's Building Team Summit held in October last year, Haughey, Brett Wilkerson, CEO of Property and Portfolio Research, and architect Tom Maier, listed their economic concerns for 2006, which include: a rough winter and the effect it could have on pricing; the retirement of Federal Reserve Board chairman Alan Greenspan; wage increase and attracting people to the industry; shortage of skilled labor; no time for mentoring; and U.S. consumers and the debt that they are carrying versus their consumption.

Explains Wilkerson, "Inflation is the biggest problem facing this country. It is running at 4.7 percent (in October). A lot of it is driven by increases in oil prices."

Other trends, issues and concerns that Wilkerson said the economy would have to face include: a boom in housing where the Baby Boomers will retire; declining office vacancies; people spending more money at the pump than at the mall; and discounters such as Target dominating the retail sales market.

"This year, household department stores were 17 percent of the Gross Domestic Product," said Wilkerson. "We have to start consuming less. To balance the trade deficit, we'll need to cut consumption by 30 percent."

According to Wilkerson, the flow of goods suggests continued demand for industrial warehouses, and the market is showing very strong growth. Investors and tenants want bigger boxes and huge distribution centers, he said.

Both distributors and manufacturers squeezed their inventory/sales ratios by about 2 percent to a record low level in '05, and they are expected to remain about the same level throughout 2006. Also, delivery lead times are expected to stretch slightly in 2006, with increase strain on manufacturing capacity worldwide.

Added Haughey, "A several-quarter period of inventory rebuilding appears to have begun at the tail end of 2005. This is partly a response to the scrambling for supplies that many buyers had to undertake immediately after Hurricane Katrina."