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Thursday, December 11, 2003

US Growth 2004 2.5 - 3% Forecast

The material from Leamer that I've seen I've liked. The arguments seem sound. Couldn't have put it better myself. Now lets see if it's accurate!

The U.S. economy will grow modestly next year, keeping the unemployment rate stuck near 6 percent and the Federal Reserve on hold as it watches for any inflationary pressure from a weaker dollar, according to a closely watched forecast released on Thursday. Edward Leamer, the director of the UCLA Anderson Forecast and one of the first economists to flag the most recent recession, said the sustained surge in U.S. growth next year that some Wall Street analysts expect will not emerge.

Instead, the economy will grow at a rate of 2.5 percent to 3 percent in 2004, rather than the 4.5 percent to 5 percent pace typical of normal rebounds from recession, Leamer said. That slower growth, the result in part of the pressure on household balance sheets and local government budgets, will not do much to lower the unemployment rate, he added. "We should get about a 1 million new jobs over the next year. But the unemployment rate sticks around the 6 percent level," Leamer said, adding that will give the Federal Reserve reason to keep interest rates down.

Unless the job market substantially improves or the falling value of the dollar raises inflation, the Fed will hold steady the federal funds target rate, the main short-term rate the Fed uses to influence the economy, Leamer said. The Fed's policy-makers voted unanimously on Tuesday to hold the federal funds rate at 1 percent, its lowest level since 1958. The Fed also vowed to keep borrowing costs down for "a considerable period."

Leamer noted that a number of factors are making the outlook for the U.S. economy hazy and difficult to forecast. Higher productivity made the third quarter "feel like a Twilight Zone episode" as a blistering 8.2 percent rise in the economy was paired with a weak job market, Leamer said. "The data are so unusual with all that economic growth and no employment," Leamer said. "It's some kind of mysterious force out there delivering products to our door." For instance, there is reason to expect a pullback in spending by consumers as well as state and local governments will emerge as drags on the economy, Leamer said. Consumers have bought enough cars and houses to last for some time, and they "need to begin to repair their own troubled balance sheets," Leamer said. Meanwhile, productivity gains of recent years and stimulus from tax cuts may run their course next year, he said.
Source: Forbes

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