The U.S. economy, primed by tax cuts and low interest rates, should grow next year at the fastest pace in two decades, but that will do little to decrease unemployment, top economic forecasters predicted Monday.
The National Association for Business Economics said the vigorous economic growth will continue to be accompanied by strong increases in productivity, as corporations under competitive pressures find more ways to expand output without hiring new workers.
That could present a political headache for President Bush in his re-election bid because the unemployment rate is a far more sensitive political barometer than productivity numbers.
But unemployment is seen headed in the right direction, at least, with a NABE forecasting panel predicting the jobless rate will average 5.8 percent in 2004, down from 6 percent currently.
The forecasting panel saw payroll employment rising by 1.1 percent, or about 1.3 million workers, not enough to replace the 2.3 million jobs that have been lost since Bush took office in January 2001.
While Democratic opponents are expected to point to weak job growth as a sign of Bush economic failures, the White House is apt to contend that the stronger economic growth is an indication that the president’s tax cuts are starting to work.
The NABE outlook, assembled by a panel of 28 forecasters from various industries, predicted that the overall economy, as measured by the gross domestic product, or GDP, will grow by 4.5 percent in 2004.
If that forecast comes true, it would represent the fastest GDP growth rate in 20 years, since the economy surged 7.3 percent in 1984 when Ronald Reagan was running for re-election.
“We are looking for a very strong bounceback,” said NABE President Duncan Meldrum, chief economist at Air Products & Chemicals Inc. of Allentown, Pa.
He said the biggest threats to the forecast are that job growth will turn out to be even weaker than currently envisioned, which could undermine consumer spending, or that consumer and business confidence will be rattled by a further escalation of terrorist attacks.
The report said GDP — the value of goods and services produced within the United States — will rise 3 percent for all of 2003, up from 2.4 percent growth in 2002. After a decade-long expansion, the economy fell into recession from March through November 2001 and has been struggling to mount a sustained rebound.
Much of the current strength is coming from tax cuts Bush pushed through Congress in May and low interest rates engineered by the Federal Reserve, which is expected to keep holding its key benchmark rate at a 45-year low of 1 percent for some time to come.
“We just have an unprecedented amount of economic stimulus coming from Washington to boost economic activities,” said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. “That is going to keep economic activity at very high levels.”
Asked why unemployment was not expected to come down any faster given the strong economic growth, the NABE analysts cited the expected continued drive by businesses to boost productivity, the amount of output per hour of work, in a tough competitive environment.
The NABE forecasters predicted that productivity would rise by 4.1 percent this year and a smaller but still strong 3.7 percent in 2004.
Strong productivity growth, while depressing job creation, has acted to keep inflation under tight control because companies can boost their profits without having to raise prices.
The report predicted consumer inflation to rise a moderate 2 percent this year, when measured from the final quarter of 2002, and an even slower 1.7 percent next year.
The nation’s twin deficits are projected to worsen, with the merchandise trade deficit forecast to hit a record $525 billion this year and set a new mark of $545 billion in 2004. The federal budget deficit, which reached a record $374 billion in 2003, will climb to $462.8 billion for 2004, the NABE panel said.
With economic growth rebounding, it said, interest rates will rise at a moderate pace. The 10-year Treasury note, a key determinant of mortgage rates, was projected to climb from to around 5 percent by the fourth quarter of next year, up from around 4.2 percent now.
That would mean that 30-year mortgages will likely rise to around 6.6 percent by this time next year, from 5.83 percent currently.
That increase will dampen housing demand, but only slightly, the report said, It predicted that housing construction will total a still robust 1.7 million units in 2004, down 5 percent from an expected 1.79 million units this year.