One of the most important things I do is help people deal with the present and plan for the future by providing insight into the economy. As part of this process, my firm releases an economic forecast every fall. In this week’s column, I’d like to share some of highlights from my analysis of the US economy. Look for further installments (including Texas and metro area forecasts) in the weeks to come.
The nation has faced a number of challenges over the past few years. Among them were the bursting of the stock market bubble in the spring of 2000, the subsequent recession, the traumatic events of 9/11/01, and public awareness of various accounting and corporate scandals that had been occurring for some time. Coupled with these difficulties were the military conflicts in Afghanistan and Iraq along with the continued American presence in those and other countries around the world. Even though the US recession was officially over as of November 2001, the recovery has been the slowest since World War II, but there are now signs of increasing momentum. The third quarter 2003 gross domestic product climb of 7.2% is the best quarterly gain in nearly two decades; it is also the broadest-based expansion in the past three years.
The services-producing sector is leading this advancement, and major contributors to the increase in real gross domestic product have been federal defense spending, nonresidential fixed investment, personal consumption expenditures, and a revival in the tech sector. The comeback in investment is likely to escalate in the future as (1) low interest rates make more projects viable once the spending cycle begins, and (2) the 1999 bubble of Y2K investment enters its replacement phase. Thus, the US economy now appears poised to begin a sustainable rebound.
Industrial activity is now increasing, and there are signs that manufacturing, which has suffered greatly over the past two years, is moving out of the doldrums. Business fixed investment, particularly in computers and structures, and capital goods investment are also showing sparks of new life and energy. The purchase of durable goods will likely see a significant hike, with expenditures on nondurable goods rising at a slightly slower pace.
As the cost of borrowing remains low, the demand for loans to purchase homes continues at a healthy level. Mortgage rates are projected to climb slightly in the coming months as overall interest rates inch up in response to signs of positive growth in the economy. However, the housing market will remain vibrant and stay a bright spot in the economy.
In terms of specific growth projections, the US economy will continue to gain momentum next year as productivity increases and the demand for domestic goods and services remains strong. Real (inflation adjusted in 1996 dollars) gross domestic product (GDP or output) is forecast to achieve a 3.40% growth rate over the next year. Meanwhile, employment (using the wage and salary measure) is predicted to see a 1.40% rate of growth from 2003 to 2004. The population of the US is projected to expand by about 1.00% next year to surpass 294.48 million. Inflation is likely to remain low, and interest rates are expected to stay at a modest level, though they will probably experience a general, upward trend.
All in all, rising productivity is anticipated to lead to greater incomes and profits, which should encourage consumption and investment. As key sectors expand and capital formation resumes, the nation’s economy will continue to gain strength. Although there will certainly be bumps in the upward trend, it appears the US economy has weathered the recent storm and is now poised for a period of renewed vigor.