Realistic Optimism for the U.S. Economy:
An Update and Consensus Forecast
CPA Workshop Luncheon
September 29, 2004
Thomas H. Payne, Ph.D.
Dunagan Chair of Excellence in Banking
The University of Tennessee at Martin
September 2004 Views on the Economy….
"The outlook remains poor, production cutbacks at Ford and GM,
mediocre personal income growth and record trade deficits all
bode poorly for economic growth and jobs creation." - University
of Maryland Business School Professor Peter Morici
"The Fed is in a very enviable position right now, the economy is
growing, competition is keeping prices down, wages are not under
pressure and commodity price rises will fade.” - William Hummer of
Hummer Investments
More September 2004 Views….
"Overall, we've added about 1.7 million new jobs since August of
2003 ….. The unemployment rate of 5.4 percent was nearly a full
point below the rate last summer and below the average of the
1970s, 1980s and 1990s” – George Bush (September 3, 2004)
"I don't think this is something to celebrate. I think it's something
to get to work on ….. this is the first president in 60 years who is
absolutely certain to be running for re-election on Election Day by
having lost jobs in America…" - John Kerry (September 3, 2004)
Job Growth is Good ..….
Nationally, in Tennessee, and in our Region
And is Continuing ….
Based on the first two weeks of September data, the U.S. economy is anticipated to
Add approximately 200,000 new jobs this month.
And, Income & Consumer Spending
Remain Strong ………..So Far
Latest Conference Board survey shows
unexpected dip in September.
September 28, 2004: 10:51 AM EDT
And, Despite Talk of “Bubbles” - No Jitters are
Evident in the Housing Market
But Some Economic Uncertainty Does Exist Oil Prices, Presidential “Dead Heat”, War on
Terror, and Interest Rates
And, What About Those Oil Prices!?
….$50/barrel!! But how bad is it in comparison
with other oil price increases?
A trader shouts orders during activity in the
The 1979 oil shock began as unrest in Iran led to
the toppling of the Shah …. Oil went from $15 a
barrel to almost $35. That would be like going from
$30 last year to $70 per barrel (instead of $50)
today.
oil trading section of the New York Mercantile Exchange
Rules of Thumb:
1 cent increase → $1 billion off consumer spending
25% increase in oil prices → .25% off GDP
And we’re back near $2.00/gallon……
While increases in oil prices increase both inflation
and unemployment, the Federal Reserve is
maintaining a strong anti-inflationary approach.
And, (Related) Growth in Corporate Profits....
Have Led to Recent Declines in Stock Prices
Bottom Line - Despite “Rational Non-Exuberance”
and Structural Changes in the Workforce –
Our Overall Economy Remains Strong…..
So, Here is the Consensus Forecast……
Note: Results from a USA TODAY economic survey conducted Aug. 13-18, 2004.
Sixty-one public and private sector economists took part.
Notwithstanding the Run-up in Energy
Prices…..Inflation Should Remain Low
And, Even with Continued Outsourcing,
Unemployment Should Continue to Decline
Consistent with GDP and Job Growth,
Interest Rates are Expected to Increase
Despite Relatively Flat Growth in
Consumer Spending
How is the Fed Doing?
The Consensus is ….. Very Good
What to Expect Next Year
 Continuing Job Growth – Strong service growth along with a modest
rebound in manufacturing.
 Outsourcing will continue and commodity prices (oil, steel, etc.) will remain
high as China and other countries continue to boom. Political pressure will
build as consumption will lag production and China to dislodge the Yuan
from the $.
 Continuing increases in short term interest rates – The Fed will continue to
cautiously raise the Fed Funds rate target (25 basis points/meeting
maximum).
 GDP will trend back toward natural rates of growth and productivity gains
will decline with decreases in unemployment.
What to Expect Next Year
 Flattening of the Yield Curve - long term rates will remain at or near current
levels due to increased demand being offset by decreased inflationary
expectations. Fixed mortgage rates may, however, increase early next year as a
result of changes in the secondary markets.
 Consumer spending will level off due to the combined effects of structural shifts
in employment, consumer debt saturation, and increased interest rates.
 However, look for 10-15% gains in the S&P 500 as uncertainty dissipates
following the election and the economy continues to gain traction.