U-M forecast: The U.S. economy should gain strength

The outlook for America’s troubled economy should brighten in the next two years, say University of Michigan economists. Although the risk of a double-dip recession—where at least one significant quarterly decline in real economic growth occurs after a recession had already appeared to be over—is still a possibility, many positive signs exist in the economic outlook, they say. “Barring further truly significant negative shocks, we expect these positives to become increasingly dominant,” says Saul H. Hymans, U-M professor of economics. “Three quarters after the end of the recession, the economic recovery is on shaky ground, but we expect the economy to strengthen in the second half of this year and to return to a better-than-trend growth path during 2003 and 2004. “Low interest rates, expansionary fiscal policy, the need to rebuild low inventory stocks and a declining dollar, which makes imports less attractive here and our exports more attractive abroad, all contribute to accelerating growth over the next year.” In their annual forecast update of the national economy, Hymans and colleagues Joan P. Crary and Janet C. Wolfe predict that real Gross Domestic Product (GDP) growth will pick up from a 1.1 percent rate for the second quarter of this year to about 2 percent during the second half of the year, resulting in a 2.4 percent pace for the entire year—about the same growth rate as two years ago. In each of the next two years, the economy is expected to expand by about 3.5 percent. “As the economic expansion becomes more firmly established over the next year, output growth on a calendar-year basis improves from a sub-par rate in 2002 to a more vigorous pace that begins to ease unemployment in 2003,” Hymans says. The unemployment rate should hover around 5.9 percent through the end of this year—up from 4.8 percent in 2001—before edging downward to 5.7 percent in 2003 and to 5.4 percent in 2004, the forecast shows. Hymans and colleagues say that inflation will remain well under control, although it will rise from 1.8 percent in 2002 to about 3 percent in both 2003 and 2004. “Moderate wage gains, continued productivity growth and weak food and energy prices all help keep inflation low this year,” Hymans says. “By 2003, the economy is strengthening, food and energy prices are rising and a weakened dollar is putting pressure on import prices. Inflation picks up but remains moderate through 2004.” As the economy begins to firm up, the Federal Reserve will raise interest rates gradually over the next two years, the economists say. This year’s conventional mortgage rate of 6.7 percent is expected to hold steady at 6.6 percent next year and then move up to 7.4 percent in 2004. The 10-year Treasury bond rate will decline from 4.8 percent this year to 4.5 percent in 2003, before rising to 5.4 percent in 2004, while the rate for three-month Treasury bills will increase from this year’s 1.7 percent to 2.6 percent next year and to 4.4 percent the year after. The U-M forecast (which is based on the Michigan Quarterly Econometric Model of the U.S. Economy and compiled by the U-M Research Seminar in Quantitative Economics) also predicts that: · Real disposable income will rise by 4.5 percent this year, 3.6 percent in 2003 and 3.5 percent in 2004. · Annual sales of light vehicles will remain fairly steady—16.6 million units this year, 16.5 million units next year and 16.6 million units in 2004. · Private housing starts will fall from 1.65 million units in 2002 to 1.58 million units in 2003 and to 1.47 million units the year after. · The federal budget surplus of $115 billion in 2001 will swing to a deficit of $133 billion this year, $256 billion next year and $307 billion in 2004. Related links:

U-M dept of Economics >> Saul Hyman’s bio >> The Research Seminar in Quantitative Economics >>