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Nov. 18, 2004

 

American economy will continue on a steady growth path

ANN ARBOR, Mich—America's post-election economy is primed for more growth in the next two years, although its expansion will not match that of the current year, say University of Michigan economists.

“The consensus is that this year will end up with a 4.4 percent growth rate—the third-strongest year of economic expansion in 20 years,” said Saul Hymans, U-M professor of economics. “For the near term, the recent presidential election seems to have given a further boost to the already-positive economic attitudes that existed among households and businesses during the run-up to the election.

“In combination with the already-strong economy, this suggests that continued economic expansion is the presumptive path as we head into 2005.”

In their annual forecast of the U.S. economy, Hymans and colleagues Joan Crary and Janet Wolfe predict 3.5 percent growth in national economic output (as measured by real Gross Domestic Product) next year and 3.8 percent in 2006.

“The economic expansion proceeds at a solid rate. Interest rates rise at a measured pace, oil prices gradually retreat, and consumers and firms both maintain upbeat sentiments,” Hymans said. “Hiring responds to sustained economic growth, accompanied by strong, but no longer extraordinary, productivity gains. A substantial number of jobs are added over the next two years and the unemployment rate moves down.”

According to the forecast, 2.2 million jobs will be added nationwide in each of the next two years, as unemployment falls from 5.5 percent this year to 5.3 percent in 2005 and to 5.1 in 2006.

As job growth rises in the next two years, so will inflation and interest rates, the economists say.

Core inflation, as measured in the consumer price index (CPI), will edge upward from 1.8 percent this year to 2.3 percent next year and to 2.6 percent in 2006, although oil prices will gradually retreat over the next two years from a high of more than $50 per barrel of crude oil to about $34 per barrel in late 2006.

The conventional mortgage rate will rise from 5.9 percent this year to 6 percent in 2005 and to 6.7 percent in 2006. The rate for three-month Treasury bills will increase from 1.4 percent in 2004 to 2.4 percent next year and to 3.4 percent in 2006, while the 10-year Treasury bond rate ticks upward from 4.3 percent this year to 4.4 percent in 2005 and to 5.1 percent the year after.

“Although interest rates are expected to be well above their recent low-points two years from now, those higher interest rate levels could hardly be considered contractionary,” Hymans said.

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 (RSQE), also calls for:

• Fewer private housing starts, down from this year's record-setting 1.94 million units to 1.88 million next year and to 1.82 million the year after.

• Rising sales of light vehicles, increasing moderately from 16.7 million units this year to 16.9 million in 2005 and to 17.1 million in 2005.

For more information about RSQE:
http://rsqe.econ.lsa.umich.edu >

Contact: Bernie DeGroat
Phone: (734) 936-1015 or 647-1847
E-mail: bernied@umich.edu