U.S. economy: Solid, but not spectacular, through 2006
ANN ARBOR, Mich.—Economic growth in the United States will be steady over the next two years, but not outstanding, say University of Michigan economists.
After a slowdown in the second quarter, real Gross Domestic Product growth will edge upward and remain in the 3.25-3.5 percent range during the latter half of this year and during much of 2005 and 2006, with solid growth in household consumption and robust business spending, they say.
"Economic growth picks up in the second half of 2004, following what Alan Greenspan termed the 'soft patch' of this spring, but oil prices remain above earlier expectations and rising interest rates keep output growth near its trend rate through 2006," said Saul Hymans, U-M professor of economics. "However, that should be sufficient for job growth to rebound from the sluggish pace of June and July."
In their annual mid-year forecast update of the U.S. economy, Hymans and colleagues Joan Crary and Janet Wolfe predict employment growth of more than 800,000 jobs in the second half of this year and job gains of about 1.9 million in each of the next two years.
While unemployment is expected to decline gradually from 5.6 percent in 2004 to 5.4 percent next year and to 5.2 percent in 2006, inflation and interest rates will continue to rise, the forecast shows.
Core price inflation (all items, except food and energy) edges upward from 1.9 percent this year to 2.6 percent in 2005 and to 3 percent the year after.
"Core inflation, by any measure, was unusually low in 2003. A return to increasing unit labor costs, rising import prices—the result of a weakening dollar—and the re-emergence of some degree of pricing power for businesses suggest a pick-up in core inflation through 2006," Hymans said.
Hymans and colleagues also expect interest rates to steadily rise. The 30-year conventional mortgage rate will increase from an average of 6 percent this year to 6.6 percent next year and to 7.5 percent in 2006. The rate for three-month Treasury bills will jump from 1.3 percent in 2004 to 2.6 percent in 2005 and to 4.1 percent the year after, while the 10-year Treasury bond rate climbs from 4.4 percent this year to 5 percent next year and to 5.9 percent in 2006.
"The Federal Reserve raised the federal funds rate in late June and again at its August meeting, bringing the funds rate to a still-historically-quite-low 1.5 percent," Hymans said. "With the economy growing at a 3.25-3.5 percent pace after mid-2004 and healthy job growth resuming, we expect the Fed to continue to raise short-term interest rates."
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:
• Oil prices will retreat during 2005 and the first half of 2006 before settling in around $32 per barrel for the latter half of 2006—barring further deterioration of the situation in Iraq and if Russia maintains its oil exports.
• Private housing starts slip from 1.9 million units in 2004 to 1.74 million next year and to 1.64 million in 2006, as mortgage rates rise.
• Sales of light vehicles hold steady at 16.6 million units this year and next, then edge upward to 16.8 million in 2006.
For more information, visit www.umich.edu/~rsqe
Contact: Bernie DeGroat