U.S. economy should get back on track after war
ANN ARBOR, Mich.The U.S. economy is poised for an upturn once
hostilities with Iraq come to an end, according to University of
"The economy is currently hobbled by a high degree of economic
uncertainty and heightened geopolitical tensions, but with the assumed
war ending by summer, oil prices slide, the domestic mood improves
and the economy jumps out of the doldrums," said Saul H. Hymans,
U-M professor of economics.
"Paced by a recovery in vehicle sales, higher defense spending
to replace depleted military supplies and a bounce-up in inventory-building,
the economy posts healthy growth in the second half of this year."
In their annual forecast update of the U.S. economy, Hymans and
colleagues Joan P. Crary and Janet C. Wolfe predict that national
economic output, as measured by real Gross Domestic Product (GDP),
will grow 5.3 percent in the third quarter of this year, cool a
bit to a 3.3 percent rate in the fourth quarter and then heat up
again heading into 2004. Overall, the economy will expand by 2.4
percent this year and 3.7 percent in 2004.
After rising by a full percentage point to 5.8 percent last year,
the unemployment rate edges upward to 5.9 percent this year, before
scaling back to 5.6 percent in 2004, the forecast shows.
Low, but slowly increasing, interest rates will accompany the post-war
economic recovery as the Federal Reserve continues to keep inflation
in check, the economists say.
"We predict that the federal funds rate will increase over
the course of next year to an average of 3 percent in the closing
quarter of 2004," Hymans said. "Such a movement up in
rates reflects the notion that the Fed can hardly permit rates to
remain anywhere near current levels if the economy continues to
expand, without risking the accrual of unacceptable inflationary
As core inflation dips to 2 percent this year before edging upward
to 2.4 percent in 2004, short-term interest rates continue to rise
next year while long-term rates hold fairly steady, Hymans and colleagues
The rate for three-month Treasury bills will increase from 1.2
percent this year to 2.3 percent in 2004, while the 10-year Treasury
bond rate creeps upward from 3.6 percent in 2003 to 3.7 percent
next year. The 30-year conventional mortgage rate is expected to
remain stable at 5.6 percent this year and 5.7 percent in 2004.
The U-M forecast, which is based on the Michigan Quarterly Econometric
Model of the U.S. Economy and compiled by the U-M Research Seminar
in Quantitative Economics, also predicts that:
· Energy prices (both crude oil and gas fuels) will retreat
in the second half of this year and then increase 4.5 percent next
· Real disposable income will rise 3.2 percent this year and
4 percent in 2004.
· Annual sales of light vehicles will slip from 16.7 million
units last year to 16.2 million in 2003, before heading back up
to 16.5 million in 2004.
· Private housing starts will decline from last year's
1.71 million units to 1.64 million this year and 1.57 million next
Research Seminar in Quantitative
Contact: Bernie DeGroat
Phone: (734) 936-1015 or 647-1847