Video: Economic speed bump

updated 5/23/2005 10:43:18 AM ET 2005-05-23T14:43:18

The yawning U.S. trade deficit probably will weigh down economic growth this year, business economists say.

The economy, as measured by gross domestic product, is projected to expand by 3.4 percent in 2005, compared with an earlier estimate of 3.6 percent, according to the latest outlook from the National Association for Business Economics.

The lower forecast mostly reflects economists’ beliefs that the trade picture will worsen. The U.S. trade deficit, which ballooned to a record $617 billion last year, is a politically sensitive subject for the Bush administration.

“Virtually the entire reduction in the panel’s estimate of GDP growth in 2005 was due to a much deeper projected trade deficit of $662 billion this year,” Carl Tannenbaum, who oversaw the survey, said in an interview.

If the projections being released Monday prove accurate, they would mark a slowing in growth from the 4.4 percent increase in GDP in 2004. That was the strongest showing in five years.

GDP, which measures the value of all goods and services produced in the U.S., is considered the broadest barometer of the economy.

If the economy does grow by 3.4 percent this year as the association projects, it would be a respectable performance.

“Our panelists still think the economy is doing fine,” said Tannenbaum, chief economist at LaSalle Bank.

The pace of growth also should be sufficient to bring about improvements in the job market. Forecasters anticipate the unemployment rate, which averaged 5.5 percent last year, will dip to 5.2 percent this year.

On the inflation front, consumer prices are expected to rise this year by 2.8 percent, compared with a previous forecast of 2.2 percent.

One of the main reasons for the higher estimate is that economists’ believe oil prices will hover around $46 a barrel this year, compared with an earlier estimate of about $40, Tannenbaum said.

Major Market Indices

Last year, consumer prices rose 3.3 percent, the most since 2000.

To keep inflation in check, the Federal Reserve probably will continue pushing short-term interest rates higher this year, the economists said.

Fed Chairman Alan Greenspan and his colleagues have raised rates eight times since last year. Each increase has come in increments of one-quarter of a percentage point.

That has put the federal funds rate — the interest that banks charge each other on overnight loans — at 3 percent. This rate is the Fed’s main lever to influence economic activity.

The funds rate should climb to 4 percent by the end of this year, the forecasters said.

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