Economy for 2005 Liable to Be Slow but Steady, Probably

A recent Knowledge at Wharton article interviewing four professors of finance and economics at the University of Pennsylvania’s Wharton School of Business indicates a reassuring consistency among about this year’s economic outlook—at least on the U Penn campus. All four economists agreed that inflation is liable to remain moderate (at a rate of 2.5%), GDP is liable to grow at 3.5% to 4%, and the stock market should remain stable, with slow, steady growth for the next year or so. Coupled with recent drops in oil prices and modest gains in employment levels and the stock market, the outlook is “decent.”

The Federal Reserve Board, according to finance and economics professor Richard Marston, has the economy under control, and as it raises interest rates over the coming months, to above 3%, in order to defuse the current inflation rate of 3.2%, mortgage rates are liable to rise 1/2 to 1 percentage point and Treasury note rates to rise to 5%. Finance professor Jeremy Siegel is predicting job growth of 200,000 jobs per month, a rate that would more than keep up with the growing labor force. Worker productivity has recently slowed to its lowest rate in two years, indicating that employers will have to hire more employees to increase production.

But there are visible pitfalls along the primrose path to recovery—for instance, Wharton finance professor David Musto muses that the possible ripple effects of a declining housing market “are not well understood.” And, as we have been horribly reminded in the last few weeks, there is also always the possibility of some unforeseen catastrophe.

Beyond even the possible negative effects of ongoing U.S. military involvements abroad or some attack at home looms the undeniable and seemingly inexorable rise in the U.S. federal budget deficit and the United States’ foreign debt level and fall of the value of the dollar relative to foreign currencies. The shifting relationships between these economic factors—such as the negative effect of permanent tax cuts on the government’s ability to reduce its deficit, or the negative effect of high oil prices on consumer spending and therefore corporate profits, or the possibly jittery psychologies of the foreign governments that have invested heavily in U.S. Treasury notes—all these factors together make the economic outlook for coming year far from definite, as all four professors also agree.

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