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Economic growth expected to dip in 2005

/ Source: The Associated Press

Economic growth will slow this year but will still be sufficient to reduce the nation’s unemployment rate, business economists say.

In its latest economic outlook, the National Association for Business Economics (NABE) predicts the economy — as measured by gross domestic product — will expand by 3.6 percent this year and next.

If the projections being released Tuesday prove accurate, that would mark slowing from the 4.4 percent growth clocked in 2004, the strongest showing in five years. GDP measures the value of all goods and services produced within the United States and is considered the broadest barometer of the country’s economic health.

“Economic growth in 2005 will moderate but still be solid,” said Carl Tannenbaum, chief economist at LaSalle Bank and head of the committee overseeing the economic forecast.

One reason economists give for the expected moderation this year is the belief that a red-hot housing market will cool and mortgage rates will rise. Consumer spending and business investment this year are expected to be solid and to help support economic growth, according to the outlook.

Forecasters anticipate that the unemployment rate — which averaged 5.5 percent last year — will dip to 5.2 percent this year and then to 5.1 percent next year.

On the inflation front, consumer prices are expected to rise 2.2 percent this year and 2.3 percent next year. Consumer prices for all of 2004 increased 3.3 percent, the largest rise since 2000.

A deceleration in consumer prices this year is based partly on the expectation that energy prices, which surged last year, will calm down. Forecasters are predicting a barrel of crude oil will cost around $40 at the end of this year, compared with $48 a barrel at the end of 2004.

The forecast was compiled before Friday’s release of a government report that showed wholesale prices — excluding food and energy costs — soared in January by the largest amount in more than six years. A government report on consumer prices for January will be released Wednesday.

For all of 2004, wholesale prices went up at a faster pace than consumer prices. Some companies, not wanting to turn off buyers, were reluctant to pass along all of their higher costs to consumers, analysts explain.

Federal Reserve Chairman Alan Greenspan, appearing before Congress last week to deliver the central bank’s twice-a-year economic outlook, offered a relatively positive view of the economy and the nation’s pricing climate.

“The evidence broadly supports the view that economic fundamentals have steadied,” Greenspan said. “All told, the economy seems to have entered 2005 expanding at a reasonably good pace, with inflation and inflation expectations well-anchored.”

Fed policy-makers, wanting to make sure inflation doesn’t get out of hand, embarked on a rate-raising campaign in June. That has resulted in six, modest quarter-point increases, leaving a key interest rate at 2.50 percent.

That key rate is expected to rise to 3.5 percent by the end of this year, according to the business economists. If that were to happen, the prime lending rate, used for many short-term consumer and business loans, would rise to 6.50 percent by year’s end. The prime rate, which moves in lockstep with the Fed’s key rate, is currently 5.50 percent.