The Year Of The Question Mark

Strength of economic growth in 2005 depends upon oil, labor market and capex.

On the Chinese calendar, 2005 is the Year of the Rooster. Economically, 2005 looks to be the year of the question mark. The strength of growth, especially for the United States, will depend upon such variables as the price of oil, the workings of labor markets and the level of capital investment. Rising oil prices have taken their toll in recent months, depressing real incomes and lowering consumer confidence among the 30 countries belonging to the Organization for Economic Cooperation & Development (OECD), Jean-Philippe Cotis, its chief economist noted in late November. Yet he said there was reason to believe that the OECD economies -- which include such industrialized economies as the U.S., France, Germany and Japan -- could grow faster than their long-term trends during 2005 and 2006. "Supported by strong balance sheets and high profits, the recovery of business investment should continue in North America and start in earnest in Europe, while consumer spending will benefit from the recent retreat of oil prices to less onerous levels, in a context where job creation is progressively strengthening and monetary conditions remain very accommodative," Cotis said. Stephen A. Meyer, vice president and senior policy adviser at the Federal Reserve Bank of Philadelphia, was fairly positive about the global outlook during a recent Wharton School panel discussion reported on the [email protected] Web site. For example, he said that the economies of Canada and Mexico, America's two NAFTA partners, would benefit as the U.S. continued to "suck in imports." In Europe, he noted, interest rates are rising in an effort to slow inflation. And in China, "the people who have been building are recognizing they are getting a little ahead," he said. "Does the global economy have traction?" rhetorically asked Victoria Marklew, vice president and senior economist at Northern Trust in Chicago during the same Wharton panel discussion at the University of Pennsylvania in Philadelphia. Her short answer: No. The Chinese economy, she said, is overheating and the Chinese may not be able to hold the yuan stable against the U.S. dollar. There are other economic risks, she added. "We are starting to see an end to easy global money. There is a risk of a global slowdown in 2005 and possibly the risk of a global housing market slump." As recently as mid-September, Michael Mussa, a senior fellow at the Washington, D.C.-based Institute for International Economics, was suggesting that global economic growth might fall short of the 4% previously forecast for 2005 because of higher oil prices and slower rates of growth in the Chinese and U.S. economies. For the U.S., the Manufacturers Alliance/MAPI, an Arlington, Va.-based business and public policy research group, expects inflation-adjusted GDP growth to be 3.4% in 2005, down from its earlier estimate of 3.7%, and it is forecasting 3.3% GDP growth in 2006. Both the 2005 and 2006 projections are slightly below the long-term average real growth rate of 3.5%. The group expects some sectors of manufacturing to be doing better than others during the next two years. In a report released on Nov. 30, the alliance foresaw double-digit growth percentages during 2005 and 2006 for four segments of manufacturing: mining, oilfield and gas-field machinery; communications equipment; computers; and metalworking machinery. It anticipated single-digit growth of at least 5% in both years for industrial machinery, pharmaceutical and medicine production, private nonresidential construction and medical equipment. For its part, the Washington, D.C.-based National Association for Business Economics (NABE) is predicting 3.6% inflation-adjusted growth for the U.S. economy in 2005. That's down a tenth of a percentage point from the 3.7% rate the group forecast in September. "NABE's forecasters became more pessimistic about the [U.S.] trade deficit in 2005, essentially eliminating a previously expected improvement of $20 billion," the association relates. At Wharton, the Philadelphia Fed's Meyer, noting consensus forecasts for 4% real GDP growth in the U.S. this year and a little less in 2005, indicated that probably would not be enough to get the unemployment rate below 5% by the end of the year. But percentages of increase won't necessarily tell the whole story. For example, results of the 2005 Gardner Research Capital Spending Survey signal a 30% increase in U.S. machine tool consumption next year. "While this is a large percentage increase, in dollar terms it is simply getting us back to a more reasonable level of consumption. . . about to where we were in 2001," says Steve Kline, executive vice president of Gardner Publications Inc., Cincinnati.

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