Posted on: Sunday, December 28, 2003

ECONOMY
Analysts upbeat, yet wary about 2004

By William Sluis
Chicago Tribune

With 2003 reduced to embers, the next question is how the economy will fare in the 12 months ahead.

A dramatic jump in growth during this year's third quarter, coupled with the lowest interest rates in 45 years, has boosted optimism about 2004. Many analysts are calling for an election-year growth rate in the range of 4 percent or 5 percent.

On the downside, pessimists fret that the recent rebound has been achieved mostly with smoke and mirrors. They argue that tax cuts and huge government deficits were the only way to revive the economy.

On the bright side, the mood of Americans has picked up sharply since autumn. That brings us to Tuesday's December consumer confidence survey from the Conference Board.

Chicago economist Robert Dederick is expecting it to show marginal slippage, to an index reading of 91.5 from 91.7 a month earlier.

Underpinning the upbeat attitude is that "the labor market seems to be improving considerably. New claims for jobless benefits are falling," said Dederick, of RGD Economics. An additional positive factor, he said, is surging prices in the stock market.

Holding back confidence, he said, is that holiday spending for the most part "has been ho-hum, instead of ho-ho-ho."

On the upside, Dederick added, are sales at auto dealerships: "People are buying a lot of new cars and light trucks, but they aren't driving them to the department stores on the way home."

Retailers are anxiously looking to Tuesday, when Wall Street surveys will try to assess the true scope of holiday outlays by consumers. Some economists believe that the free-spending habits of the recent past will soon be history.

"While consumer spending remains solid as 2003 comes to an end, it looks downright subdued compared with last quarter's tax-cut-fueled explosion," said economist Geoffrey Somes of FleetBoston Financial.

He noted that in this year's third quarter, spending shot up by 6.9 percent, the strongest in 17 years. But Somes notes that data point to fourth-quarter spending growth of no more than about 2.5 percent.

"Consumers are optimistic about improving prospects for the economy but remain understandably cautious about jobs, given meager gains up to this point," he said.

Also Tuesday, the National Association of Realtors reports November existing home sales. Despite a 2.4 percent drop in new home sales for the month, analysts are hopeful that overall activity will remain at near record levels.

Expectations that manufacturing would lead the expansion in coming months were dealt a setback last week, when November orders for durable goods fell by an unexpected 3.1 percent. The decline was the first in three months and the largest since September 2002.

The big concern for the manufacturing sector remains overcapacity, which is at high levels, making it impossible to raise prices for goods.

Economists expect Friday's December survey of purchasing managers from the Institute for Supply Management to show a slight dip, to an index reading of 62.2 from 62.8 a month earlier.

The big fear for the stock market as it faces 2004 is that the economy will rapidly run out of momentum, letting the air out of corporate profits.

Chicago investment manager Marshall Front of Front Barnett Associates says such fears are without merit, "although it is unrealistic to expect the economy to expand at an 8.2 percent rate indefinitely."

He sees "above-trend growth continuing, but at a more modest pace."

His advice for investors in equities: "Don't expect returns of 25 percent. Stocks should return 10 (percent) to 12 percent, which would be in line with expectations of earnings growth" for Standard & Poor's 500 stocks.