New York, NY, July 7--Massive fiscal stimulus, in the form of tax cuts, and improving business profits should lead to a long awaited economic rebound in the second half of the year, according to 54 economists surveyed by The Wall Street Journal.
A forecast for an improving economy isn't new and needs to be read with caution; the same group of economists has been predicting better times for nearly three years, only to find the path marked by disappointments.
Warning signs continue, as the Federal Reserve raises concerns about possible deflation, and the job market remains stagnant. Nevertheless, economists argue that the expected improvement, which is being hinted at by a rising stock market, will be real this time.
The nation's gross domestic is projected to grow at a 3.5% annualized rate in the third
quarter and at a 3.8% rate in the fourth quarter, according to the Journal's monthly forecasting survey. Those projected growth rates are the average estimate of the economists surveyed, and they are up slightly from the previous month's poll. The economy is projected to grow at a rate of 3.8% during the first half of 2004.
"This has been a horrible business cycle, but I feel better about the prospects for the U.S. and global economy than I have for four years," said Allen Sinai, chief economist at Decision Economics Inc. A few months ago, Sinai was warning about a possible return to recession. Now, he has nudged upward his forecast for the second half of the year to a GDP growth
rate of about 3.3%.
Moreover, the economists now have the stock market on their side. A year ago when they were calling for an upturn, stock prices were falling--a drag on confidence that was unprecedented for an economic recovery. This time, the Dow Jones Industrial Average was up 8% through the first six months of the year and the Standard & Poor's 500-stock index was up 11%. Forty-nine of the
economists surveyed said they expected the Dow industrials to finish above 9000 points this year.
Several economists say they should be excused for being too optimistic about the outlook in recent years because growth has been derailed by a series of unpredictable shocks--including the Sept. 11 terrorist attacks, the war with Iraq and the accounting scandals that rattled the corporate sector.
"If you had dreamed this up, you would have been viewed as a bad novelist," said Robert DiClemente, chief U.S. economist with Citigroup Inc. "We didn't have these shocks in our numbers."
Yet these unexpected developments don't explain all of the missed calls on growth. Last year at this time, for example, after the magnitude of the accounting scandals had already become clear, the consensus was still predicting a return to growth rates of about 3.5%. Instead, the economy grew at a 1.4% annual rate in the fourth quarter of 2002, and repeated that performance in the first quarter of this year. The second quarter growth rate is believed to have been close to the same tepid level. The Commerce Department will report preliminary second quarter growth later this month.
Of the 54 economists surveyed, 16 said they expected the economy to grow below 3.5% in the next six months, four said it would grow at that rate, and 34 predicted above-trend growth.
But all sides agree on one point. With nearly $200 billion in federal tax cuts being thrown at the economy in the next 18 months and with short-term interest rates near zero, now is the time to see economic results. If the economy continues to languish in spite of the stimulus, policy makers will be without many tools to fix it.
"We're force feeding the private sector with a lot of money," said Sinai. "If we swallow that stuff and don't spend, we are indeed in big trouble."
