ANN ARBOR—While the U.S. economy’s sluggish growth rate since last summer has sparked fears of a recession, University of Michigan economists say that those worries are unfounded.

“The economy has slowed dramatically over the past year and is likely to register near-zero growth in the current quarter,” says Saul H. Hymans, U-M professor of economics. “Rising interest rates, spiking energy prices and a retreating equity market have dimmed economic prospects and shaken consumer confidence, but a true recession is not expected.”

Although the growth rate for real Gross Domestic Product (GDP) is forecast at just 0.8 percent for the first half of 2001, the economy should pick up steam in the second half of the year with a 2.9 percent rate of growth, Hymans and colleagues say. Overall, the economy should grow by 1.8 percent this year—down from last year’s 3.4 percent mark—before expanding by 4 percent in 2002.

In their annual forecast update of the national economy, Hymans and colleagues Joan P. Crary and Janet C. Wolfe say that greater economic growth next year will be enough to temper the current trend of rising unemployment. While they predict that the unemployment rate will rise from last year’s average of 4 percent to 4.6 percent this year and to 4.8 percent in 2002, the jobless rate should drift downward below the current year’s average by the end of next year.

As a result of declining energy prices, consumer price inflation is expected to drop from an overall mark of 3.4 percent in 2000 to 2.6 percent this year, before notching upward to 2.9 percent next year, according to the U-M economists.

“All of these developments, and their likely consequences in 2003, cause us to believe that the Federal Reserve will turn its sights back toward inflationary risks by the end of next year,” Hymans says. “The Fed has moved aggressively to head off a recession, reducing interest rates 100 basis points since the start of the year, and we’re expecting another 50-basis-point decline this month.

“That move, we believe, will put the Fed back into a wait-and-see mode because the economy isn’t nearly as weak as the news hype implies and because the Fed will want to set its longer-term policy to be consistent with the likely more expansionary track of fiscal policy in 2002 and beyond.”

In the meantime, consumers will enjoy lower interest rates. The conventional mortgage rate is expected to hold steady at 6.9 percent this year and 6.8 percent next year, down from 8.1 percent in 2000. The rate for three-month Treasury bills will fall from last year’s 5.8 percent to 4.6 percent throughout this year and next, while the Aaa corporate bond rate will decline from 7.6 percent in 2000 to 6.8 percent this year and to 6.6 percent in 2002.

Hymans and colleagues say that President Bush’s $1.6 trillion tax cut proposal, which is now winding its way through Congress, would not significantly affect short-term economic prospects.

“It will have some small positive impact on economic growth late this year and next year,” Hymans says. “And the passage of the tax cut could have a significant indirect effect by shoring up near-term consumer confidence. Indeed, the tax cut now appears to be so nearly a given that a political stalemate could well hurt consumer and business confidence sharply.”

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:

•Real disposable income will increase 3 percent this year and 3.6 percent next year.

•Annual sales of light vehicles will remain relatively strong at 16.7 million units in 2001 and 2002, after posting a record-setting mark of 17.2 million units last year.

•Private housing starts will drop from 1.61 million units in 2000 to 1.56 million this year, before rebounding to nearly 1.6 million in 2002.

•Oil prices, which peaked at about $32 per barrel in the fourth quarter of last year, will decline to $27 per barrel later this year and remain in the $26-$27 per barrel range throughout 2002.

•The federal budget surplus will rise from $218 billion in fiscal 2000 to $244 billion this year, before plummeting to $187 billion in 2002.

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