U.S. Economy: Solid Expansion Still In Sight

Despite the human toll and regional costs of this year's hurricanes, the magnitude of the federal budget deficit, the huge trade deficit with the rest of the world and concerns that housing is a bubble about to burst, the U.S. economy will likely record a solid expansion in 2005.

For example, the Washington, D.C.-based National Association for Business Economists (NABE) forecasts GDP growth, adjusted for inflation, of 3.5% this year. That matches Global Insight's expectation for 2005 and is only a tenth of a percentage point higher than Merrill Lynch & Co.'s projection of 3.4%. With its forecast of 3.4% real growth for next year, the NABE is looking for 2006 to be pretty much a GDP repeat of 2005.

These are solid growth numbers, especially taking into account that, at least in the short-term, hurricanes Katrina and Rita will have subtracted a few tenths percent from the economy during the second half of this year. NABE figures Katrina subtracted four-tenths of a percentage point from GDP growth in the third quarter and is subtracting two-tenths during the current quarter. "Hurricanes destroy wealth -- but rebuilding that wealth creates activity," notes Waltham, Mass.-based Global Insight. "The scale of Katrina's destruction means that the boost to growth will take longer than usual to come through, although it will be evident in 2006."

2005 At A Glance The year as business economists see it. Real GDP +3.5% CPI +3.2% Core CPI +2.3% Unemployment rate 5.1% Industrial production +3.2% Manufacturing capacity utilization 78.3% Federal funds rate (yearend) 4%

Energy prices remain a concern in estimating both growth and inflation, if for no other reason than these prices remain hard to predict. The NABE assumes a barrel of crude oil will be priced at $63 at the end of 2005 and not all that much lower at $55 at yearend 2006. Global Insight puts a barrel of West Texas Intermediate in the $65 to $67 range for the rest of this year and at $54 at the end of 2006. These are numbers subject to revision as refineries come back -- or don't quickly come back -- on line.