ANN ARBOR—America’s tepid economy is prime for robust growth in the second half of this year and throughout 2004, according to a University of Michigan annual economic forecast update.

Barring further negative environmental shocks such as terrorism, war, nuclear proliferation, corporate scandals and the like, U-M economists expect the economy to continue to pick up steam.

“The Federal Reserve Board has taken interest rates to record lows and has clearly hinted that it has no intention of raising rates before the evidence of a strong and sustainable expansion is firm,” said Saul Hymans, U-M professor of economics. “Further, federal tax policy remains highly expansionary with more tax cuts yet to phase in, the stock market has recovered significantly since the early months of this year, and the latest data on consumer sentiment, retail sales, new orders, initial jobless claims and economic strength abroad are all upbeat.”

Hymans and colleagues Joan Crary and Janet Wolfe predict that national economic output, as measured by real Gross Domestic Product (GDP), will increase 4 percent in the second half of 2003 and average 4.5 percent growth next year.

Rising economic growth will spur employment, dropping the jobless rate below 6 percent by early 2004, the economists say. They predict that unemployment will fall from 6.1 percent in 2003 to 5.8 percent next year and to 5.4 percent in 2005.

Since the beginning of the 2001 recession and the subsequent jobless recovery period (November 2001 to the present), more than 2.5 million payroll jobs have been lost. The job count, the economists say, will bottom out in the current quarter and then begin to increase later this year. Average annual growth will be just shy of 2 percent in each of the next two years.

“As the economy gains momentum and productivity growth moderates, job growth returns, but the job count remains below its pre-recession peak until late 2004—three years after the economic recovery began,” Hymans said. “That’s one year longer than was needed following the 1990-91 recession.”

In addition to a rosier outlook on the employment front this year and next, interest rates and inflation should remain under control before ticking upward in 2005, Hymans and colleagues say.

They predict the conventional mortgage rate will hold steady at 5.8 percent this year and 5.9 percent in 2004 and then rise to 6.4 percent in 2005. The rate for three-month Treasury bills will increase from 1 percent this year to 2 percent next year and to 3.7 percent in 2005, while the 10-year Treasury bond rate edges upward from 3.9 percent in 2003 to 4 in 2004 and to 4.6 percent the year after.

Core inflation is expected to rise 1.5 percent this year, 2.6 percent next year and 3.1 percent in 2005, the report predicts.

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 calls for:

• Declining energy prices (both crude oil and gas fuels), which will fall 13 percent in 2004 and 11 percent in 2005.

• Fewer private housing starts, down from this year’s 1.68 million units to 1.64 million next year and 1.58 million the year after.

• Rising sales of light vehicles, increasing from 16.3 million units this year to 16.8 million in 2004 and to 16.9 million in 2005.

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Saul H. Hymans