U.S. economy will pick up steam in the year ahead

November 21, 2002

U.S. economy will pick up steam in the year ahead ANN ARBOR—The American economy will improve in the next year and by 2004 economic growth will surge to levels of the late 1990s, according to a new economic forecast by the University of Michigan. "We’ve assumed no more cuts in interest rates by the Fed, nor do we expect a sudden renewal of the old confidence in the integrity of big business, a boom in the stock market, and quick regime changes in Iraq and elsewhere," said Saul H. Hymans, U-M professor of economics. "Rather, our forecast is based on a scenario in which things aren’t quite as bad as we’ve been fearing—no major new corporate scandals, the jobs outlook stabilizes, profits improve slowly, things get temporarily dicey in Iraq as the inspections become more intrusive, but no big blow up." In their annual forecast of the U.S. economy, Hymans and colleagues Joan P. Crary and Janet C. Wolfe predict that national economic output, as measured by real Gross Domestic Product (GDP), will expand at a rate of 4 percent as early as the middle of next year and will remain at that rate in 2004—matching the average growth rate for 1995-2000. On the whole, the economy will expand by 2.5 percent in 2003, due to slow economic growth expected in the early part of the year. The rate is similar to this year’s projected GDP growth of 2.3 percent, which is still considerably higher than the 0.3 percent rise posted last year. Falling unemployment, moderate inflation and low, but slowly increasing, interest rates will accompany the rise in economic growth after the middle of next year, the forecast shows. "After the weakness and uncertainty characterizing the turn of the year, output accelerates to a robust pace," Hymans said. "A retreat in vehicle sales accounts for the late 2002 weakness and businesses remain cautious with respect to inventory building early in 2003. "As final demand growth accelerates during the year, businesses respond with higher levels of inventory investment. Near-term economic weakness pushes up the unemployment rate at the turn of the year, but the labor market is strengthening by mid-2003." According to the forecast, the unemployment rate, which has climbed from 4.8 percent in 2001 to 5.8 percent this year, will peak early next year. Overall, unemployment should average 6 percent in 2003 and then scale back to 5.5 percent in 2004. Consumer price inflation, excluding the volatile food and energy components, will remain in check, falling from last year’s rate of 2.7 percent to 2.4 percent in both 2002 and 2003, before edging up a bit to 2.6 percent in 2004, the U-M economists say. Interest rates will continue to drop in the first half of next year, but then begin to climb heading into 2004, they say. Overall, the conventional mortgage rate is expected to fall from last year’s 7 percent to 6.5 percent this year and to 6 percent in 2003, before rising to 6.6 percent in 2004. The 10-year Treasury bond rate will decline from 5 percent in 2001 to 4.6 percent this year and to 3.6 percent next year, and then go back up to 4.4 percent in 2004, the forecasters say. The rate for three-month Treasury bills will drop from last year’s 3.4 percent to 1.6 percent for this year and next, before moving up to 3.9 percent in 2004. 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: · Real disposable income will rise by 4.3 percent this year, 3.1 percent in 2003 and 4.1 percent in 2004. · Consumer spending growth will drop from 3 percent in 2002 to 2.4 percent in 2003 and then increase to a strong 3.3 percent the year after. · Annual sales of light vehicles will decline from last year’s 17 million units to 16.5 million this year and to 16.3 million in each of the next two years. · Private housing starts will fall from 1.68 million units this year to 1.62 million in 2003 and to 1.57 million in 2004.

For more information, visit: http://rsqe.econ.lsa.umich.edu/index.html Email: bernied@umich.edu