Economic forecast upbeat — unless you're unemployed

By Sue Kirchhoff and Barbara Hansen
USA Today

The upbeat survey, conducted over six days ending Wednesday, predicts the U.S. economy, which grew at a 3.3 percent annual rate in the second quarter, will expand at a strong 4 percent clip in the fourth quarter and 3.8 percent in all of 2004.

However, even with the faster growth, the weak job market should recover only gradually.

Three-fourths of the economists surveyed expect hiring to pick up by early next year to a rate of 100,000 or more net new jobs a month.

But the jobless rate is forecast to hover in the 5.8 percent to 6 percent range for much of next year. The unemployment rate in September was 6.1 percent.

None of the economists expects the Federal Reserve to raise interest rates, now at a 45-year low of 1 percent, when it meets Oct. 28. More than half don't expect a rate increase until the second half of 2004; 18 percent say the Fed will hold off until 2005 or later.

Robert Goodman of Putnam Investments was one of the more upbeat forecasters, predicting the economy grew at a 5.8 percent pace in the third quarter.

The government releases its preliminary estimate for third-quarter gross domestic product on Oct. 30.

The quarterly predictions could vary based on such factors as trade and business inventories, Goodman says, but the economy has clearly picked up — growing 2.5 percent from the second quarter of 2002 to the second quarter of 2003.

Rich Yamarone of Argus Research is less optimistic, expecting economic growth to be less than 4 percent in the third quarter. He warns there will not be a repeat of the defense spending surge that helped fuel second-quarter growth.

"(Federal spending and tax cuts) have been masking the underlying tone," Yamarone says. "The economy is in a little bit of a fragile state, though far from recession."

Consumer inflation should remain muted, running 2.1 percent year-over-year in the fourth quarter of 2003 and 1.7 percent in 2004. After-tax corporate profits are expected to rise 15 percent in the third quarter on a year-over-year basis, and an even stronger 18 percent in the fourth quarter. Business spending, the missing ingredient in the rebound, should rise at an 8.5 percent seasonally adjusted annual rate in the third quarter of 2003 and average 8.4 percent in 2004.

Some are more cautious, saying that despite higher profits, there are few tangible signs so far of a big pickup in business spending.

The economists predict mortgage rates will remain in the 6.1 percent to 6.5 percent range through the third quarter of 2004, assuring the housing market will remain strong.