New York, Jan 2--The jobless recovery may need a new nickname in 2004. That's because rising corporate profits and steady economic growth are expected to prompt companies to hire workers more aggressively in the months ahead.
That's the consensus view of 54 economists surveyed by The Wall Street Journal, who as a group believe the U.S. unemployment rate will slowly descend to 5.5% by November. That could translate into more than 1.5 million new jobs in a 12-month period. And while a 5.5% unemployment rate would still be far above the 3.8% rate achieved in April 2000, it would nevertheless represent a notable decline from the 6.4% level reached last summer and could provide a psychological boost to workers and an electoral boost to President Bush.
The economy isn't expected to boom, either. But economists are cheered by the expectation that the economic recovery, which picked up momentum in the second half of last year, remains on track and will run deep enough to trigger meaningful gains in employment and business spending. The consensus forecast calls for real gross domestic product -- the broadest measure of economic output -- to grow at an annual rate of 4.5% in the first quarter, 4.3% in the second quarter and 4% in the second half of the year. That's somewhat slower than estimates of the just-ended second half, which was marked by an 8.2% growth surge in the third quarter, but represents a sharp acceleration from the 2.6% rate that prevailed between the official end of the recession in November 2001 and the beginning of the third quarter of 2003.
Economists are even putting their own money behind their forecasts, with 93% of respondents saying they raised the amount of their personal savings invested in the stock market in the past year. Half of the respondents are expecting the Dow Jones Industrial Average to exceed 11000 by year end, up from 10453.92 at the close of 2003.
Many forecasters believe the economy will go through a transition in 2004. Last year, households did much of the heavy lifting for the economy, snapping up automobiles, homes and other durable goods and in the process helping to contribute to a rebound in business profits. Now that their own financial houses have been repaired, businesses are expected to lead the way in 2004, by investing more in new equipment, hiring more and slowing down their rapid pace of inventory reductions. Forty-six of the 54 economists surveyed said business investment would be the driving force behind the 2004 rebound in growth.
Not only is the corporate sector back on its feet after the profit declines and accounting scandals of recent years, but the economy has been primed by Washington policy makers to perform in 2004. According to estimates from Sung Won Sohn, an economist with Wells Fargo, $149 billion in tax cuts are in the fiscal pipeline in 2004, most of it early in the year. Meanwhile, Federal Reserve officials have moved short-term interest rates to their lowest levels in more than 40 years, a factor that is making it easier for both households and businesses to raise money to purchase new products and to invest.
Economists point to a variety of factors for their call for business-led growth. Corporate profits were up more than 25% in the third quarter from a year earlier, and are expected to continue to rise by 15% in 2004. That provides executives with cash flow and confidence. Risk aversion in boardrooms and in financial markets appears to be waning.
Moreover, executives will have a huge incentive to invest in the coming year: Tax breaks that allow them to improve their cash flow by quickly writing off the value of newly purchased assets will expire at the end of the year unless Congress acts to extend them.
Yet the predicted pattern of growth suggests the path is hardly clear for a U.S. economy that has endured a stock-market collapse, terrorist attacks, war and accounting scandals during the past three years. The economy is expected to register its strongest growth during the first quarter and then taper off by year end. After 4.5% growth in the first three months of the year, the pace of expansion is expected to slow to 3.9% by year end.
Going into 2005, some economists believe, the economy could start running into more serious headwinds. Most notable, 24 of the 55 economists surveyed said they had big worries about two mounting U.S. imbalances: a budget deficit that could top $500 billion in 2004 and a trade deficit also in excess of $500 billion. The twin deficits leave Americans increasingly dependent on foreign investors and central banks to finance U.S. investment and spending.
The other notable shift in the forecast revolves around the Federal Reserve system's policy on short-term interest rates. Fed officials have gone to great lengths in recent months to assure investors that they plan to keep short-term interest rates low for a "considerable period" of time. Economists believe that the considerable period will end in June, when the Fed is expected to begin nudging up the benchmark federal-funds rate.
Nearly half of those surveyed said short-term interest rates were already too low and nearly two-thirds said they expected some increase in inflation in 2004, though few expected large increases in inflation.
