SIGNS POINT TO STRONG/04 U.S. ECONOMY

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Many Signs Point to Strong 2004 Economy

WASHINGTON (AP) – For the U.S. economy, 2004 could turn out to be a banner year.

Forecasters believe Things are falling into place to produce the strongest economic growth in two decades. Consumer spending will be bolstered by tax refund checks early in the year. Businesses are finally beginning to invest in new plants and equipment and rehiring some laid off workers, though improvements in the unemployment rate are expected to be modest.

“The economy is off and running, and 2004 should be a very good year,” said Mark Zandi, chief economist at Economy.com.

That should be welcome news for President Bush and other incumbents who face voters next year. Many analysts believe the overall economy, as measured by gross domestic product, will expand next year by 4.6 percent or more, the biggest gain since 1984, when another Republican president, Ronald Reagan, was running for office.

But analysts believe there will be much less improvement in unemployment as businesses concentrate on boosting productivity so they can expand output without hiring new workers.

For that reason, the current jobless rate of 5.9 percent – down from a high this summer of 6.4 percent – is expected to still be around 5.7 percent when America votes next November.

In addition to the boost from last year’s tax cut and low interest rates, analysts are looking for economic strength from increased federal spending, which has soared in such areas as the war against terrorism.

The federal budget deficit is projected to hit a record $500 billion in 2004.

“Never bet against a politician’s willingness to spend in an election year,” said Diane Swonk, chief economist at Bank One Corp. in Chicago, who predicted that the economy in 2004 will not be the curse to Bush that economy of 1992 proved to be for his father’s re-election hopes.

A sustained upturn has been long in coming since the bursting of a stock market bubble in 2000 triggered the end of the longest economic expansion in U.S. history.

The decade-long expansion ended in March 2001; the decline deepened with the terrorist attacks that fall.

Just as the economy began to regain its footing in 2002, consumer and business confidence was shaken by corporate accounting scandals and then by uncertainties of the Iraq war buildup.

However, a third round of tax cuts, combined with the lowest interest rates in 45 years provided by the Federal Reserve, finally ignited stronger growth this past summer. This time, economists believe the recovery will not falter.

The sustained recovery should translate into job increases of 100,000 or more per month, which would translate into at least an additional 1.2 million more jobs next year, the first positive year for job growth since 2000. Since the recession began in March 2001, the country has lost 2.35 million payroll jobs.

And in a significant change from past downturns, workers who lost their jobs have stayed unemployed far longer. The proportion of unemployed workers who have been without a job for more than six months hit 24 percent in November, a 20-year high, which Bush’s Democratic opponents contend is evidence of the president’s mishandling of the economy.

One architect of Bush’s economic policy, former economic adviser Larry Lindsey, predicted growth over 4 percent and job gains of 150,000 to 200,000 a month.

“What we’ve seen is the recovery of profits. Whether you like them or not, profits are necessary before people turn around and invest and before people are hired in new jobs,” Lindsey told ABC’s “This Week” program on Sunday.

Robert Reich, labor secretary in the Clinton administration, responded that the nation hasn’t seen anything close to the job creation Lindsey forecast. “This has been the most anemic jobs recovery we’ve seen in recent American history,” Reich said.

David Wyss, chief economist at Standard & Poor’s in New York, predicted GDP growth next year would hit 4.7 percent, in line with many private analyses.

Wyss and other forecasters believe the Federal Reserve will keep interest rates low most of the year despite stronger growth because inflation will continue to be a no-show. Many don’t expect the first Fed rate increase until after November’s election.

Sung Won Sohn, chief economist at Wells Fargo in Minneapolis, said that continued low interest rates, coupled with what he estimates will be $149 billion in tax relief in the pipeline for 2004, will provide the economy a strong tail wind.

A recent survey by the 600,000-member National Federation of Independent Business found the outlook among small business owners rising to the highest level since late 1983.

“Business optimism about 2004 is really strong,” said NFIB chief economist William Dunkelberg.

Of course, analysts caution that unforeseen developments, such as a surge in oil prices sparked by further conflict in the Middle East or a terrorist attack on U.S. soil, could make current forecasts wildly optimistic.

“The big risks are external shocks, either from higher global oil prices, or weaker-than-expected growth in areas such as Japan and Europe,” said Sohn.

But if the forecasts turn out to be accurate, the private analysts believe the economy will help Bush’s re-election chances.

“Bush’s father made the mistake of having the recession a year too late so there wasn’t enough time for the recovery to really get going in 1992,” said Wyss. “The timing for the current president is almost perfect.”

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December 29, 2003 at 10:48 AM