A top panel of business economists upgraded their forecast for U.S. economic growth for the fourth time in a row to a robust 4.7 percent, but inflation expectations also picked up sharply, it said on Monday.
The National Association for Business Economics panel of 31 professional forecasters said rising energy and commodity prices would feed into 2.3 percent inflation this year -- up sharply from the forecast for a 1.6 percent rise in the consumer price index just three months ago.
Inflation for 2005 was also pegged at 2.3 percent -- up from 1.9 percent projected in the February outlook.
"One should conclude from the latest survey that the expansion is now on a solid and sustainable path. If there is a dark lining in this silver cloud, however, it is the upward revision to the panel's forecast of inflation for 2004 and 2005," chief economist Duncan Meldrum said in releasing NABE's May outlook survey.
Still, the panel said it does not expect the Federal Reserve to raise interest rates sharply enough to dampen economic growth through 2005.
The economists raised their outlook for this year's growth to 4.7 percent from 4.6 percent in their February survey, the fourth time the 2004 outlook has been upgraded. The forecast for 2005 was unchanged at a milder 3.8 percent rise.
Signs of a strong pickup in employment in recent months have cemented market expectations for the Fed to begin raising short-term interest rates, possibly as early as June. Interest rates were dropped to a 1958 low of 1 percent last year in a bid to strengthen the slow recovery from the 2001 recession.
The NABE panel also upgraded their forecasts for employment growth in six of the next seven quarters and predicted the unemployment rate would drop to an annual average of 5.5 percent this year and an even better 5.3 percent in 2005.
The economists said the biggest risk for their growth forecast remained a terrorist attack, but recent energy price hikes and a sharp increase in market interest rates were also high on the list of downside risks.
They said the impact of rising energy prices -- and resulting higher transportation and production costs -- was the most important factor in the recent upturn in core inflation. Rising steel and lumber prices, buoyant demand outpacing supply and the weaker dollar also contributed.
Despite the higher inflation, the panel forecast little change in the path of short-term interest rates compared to the February survey. Three-month Treasury bill yields were expected to average 1.68 percent in December versus 1.60 percent forecast three months ago.
But long-term interest rate forecasts were bumped higher, with the yield on the 10-year Treasury note seen averaging 4.63 percent this year -- up from the 4.55 percent predicted in the February survey.
The panel said GDP growth this year would be driven by a 9.8 percent increase in business fixed investment and a 9.4 percent rise in exports, while residential investment and consumer spending would both climb 3.9 percent.
"Business investment growth is driven, in part, by the panel's forecast of an 18.4 percent gain in after-tax corporate profits this year, followed by a projected gain of 17.0 percent next year -- both higher than previous estimates," NABE said.
The trade deficit was forecast to widen to $550 billion this year, slightly bigger than the February projection, while the federal budget deficit was expected to hit $464.4 billion, smaller than the February estimate of $492.5 billion.