Take Your Pick Of Three Recovery Scenarios

Jan. 13, 2005
By John S. McClenahen The basic economic forecast for the rest of 2002 and into 2003 from DRI/WEFA of Lexington, Mass., is more bearish than several others: just 1.5% GDP growth in the current quarter and 2.2% in the third calendar quarter of 2002; GDP ...
ByJohn S. McClenahen The basic economic forecast for the rest of 2002 and into 2003 from DRI/WEFA of Lexington, Mass., is more bearish than several others: just 1.5% GDP growth in the current quarter and 2.2% in the third calendar quarter of 2002; GDP growth of 4.3% in the fourth quarter of this year dipping to 3.5% in the first quarter of 2003; a 2.5% rate of increase in the CPI for next year following a 1.8% increase this year; and four 25-basis point increases in short-term interest rates by the end of 2002, beginning with the Federal Open Market Committee's Aug. 13 meeting. The probability of all of this happening: 50%, says the forecasting firm. But DRI/WEFA has alternative scenarios, one faster and one slower, and it gives each of those a 25% probability. The U.S. economy would grow faster, at a rate of 3.9% in 2003, if over the next four calendar quarters the U.S. dollar dropped 15% below its baseline value, hypothesizes DRI/WEFA. Imports would fall and exports would rise. But inflation would rise as well -- advancing 3.1% in 2003 despite a tighter monetary policy from the Fed. The unemployment rate would fall to 5.5%, versus 5.7% for the basic forecast, in 2003. However, if consumers became more cautious and investment stagnated, the U.S. would continue to have a recovery from 2001's recession, but just barely. Real GDP would grow at an anemic 1% to 1.5% through next spring, mostly because of productivity gains. Unemployment, after averaging 6% in 2002, would average 6.6% in 2003 as new entrants to the workforce found few jobs.

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