New York, July 3--The Federal Reserve has been fanning deflation fears. The labor market is stagnant. And the war in Iraq took more air out of the economy than expected. So how are forecasters responding to the gloomy economic news? They're sticking to their call for an economic rebound in the second half of the year.
The nation's gross domestic product -- the broadest measure of economic activity -- 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 Wall Street Journal's forecasting survey. Those projected growth rates are the average estimate of 54 economists surveyed and they are up slightly from May. The economy is projected to grow at a rate of 3.8% during the first half of 2004.
To some, the chorus coming from the economic forecasting community is starting to sound a little bit like an endless loop of the children's song, "She'll Be Coming Around the Mountain When She Comes." For the most part, the group has been saying that a recovery is just around the corner for nearly three years. Instead, the path has been pockmarked with disappointments.
But economists say massive fiscal stimulus, in the form of tax cuts, and improving business profits should make the expected bounce real this time. Twenty-two of the 54 economists said they believe the recent tax-cut legislation will provide a "strong" boost to the economy; 30 said it would provide a "modest" boost. Even some recent bears offer a grudging case for optimism about the near-term outlook.
"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," says Allen Sinai, chief economist at Decision Economics. A few months ago, Mr. Sinai was warning about a possible return to recession. Now, he has nudged up his forecast for the second half of the year to a GDP growth rate of about 3.3%. He estimates households will have an additional $47 billion of cash to spend in the coming six months, thanks to the combination of income tax cuts, child tax credits and "marriage penalty" relief passed last month by Congress and signed by President Bush.
Moreover, the economists now have the stock market on their side. Last year 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 index was up 11%. Forty-nine of those surveyed said they expected the Dow to finish above 9000 this year. Many are putting their money where their mouth is; 35 said they had increased their own stock holdings in the past year, up from 14 who said they were increasing holdings when surveyed in January.
The projected pickup in growth, in turn, is expected to lead to a slight increase in interest rates in the months ahead. By December, the yield on the benchmark 10-year bond is expected to rise from about 3.5% today to 3.85%.
However, growth is not expected to be strong enough to create many new jobs. The unemployment rate is expected to remain unchanged through the end of the year, and then decline slightly to 5.8% by June 2004 from 6.1% in May. Corporate profits, meanwhile, are expected to rise 7.7% this year and 12.3% in 2004 while the red-hot housing sector is expected to cool a bit.
