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U-M economists: U.S., state economies will pick up steam in year ahead

"After the weakness and uncertainty characterizing the turn of the year, output accelerates to a robust pace," Hymans said. "A retreat in vehicle sales accounts for the late 2002 weakness and businesses remain cautious with respect to inventory building early in 2003.
Hymans (Photo by Paul Jaronski, U-M Photo Services)

"As final demand growth accelerates during the year, businesses respond with higher levels of inventory investment. Near-term economic weakness pushes up the unemployment rate at the turn of the year, but the labor market is strengthening by mid-2003."

According to the forecast, the unemployment rate, which has climbed from 4.8 percent in 2001 to 5.8 percent this year, will peak early next year. Overall, unemployment should average 6 percent in 2003 and then scale back to 5.5 percent in 2004.

Consumer price inflation, excluding the volatile food and energy components, will remain in check, falling from last year's rate of 2.7 percent to 2.4 percent in both 2002 and 2003, before edging up a bit to 2.6 percent in 2004, the economists say.

Interest rates will continue to drop in the first half of next year, but then begin to climb heading into 2004, they say. Overall, the conventional mortgage rate is expected to fall from last year's 7 percent to 6.5 percent this year and to 6 percent in 2003, before rising to 6.6 percent in 2004.

In Michigan, the state will lose 35,000 jobs this year, but will gain back 28,000 jobs during 2003 and then will more than triple next year's employment gains with 88,000 jobs during 2004, the state report predicts.

"That Michigan residents have become increasingly jittery about the state's economic recovery is hardly surprising," Fulton said. "We are not out of the woods quite yet, but will be soon. The American economy will improve in the next year and by 2004 economic growth will surge to levels of the late 1990s, according to a new economic forecast by U-M.

"We've assumed no more cuts in interest rates by the Fed, nor do we expect a sudden renewal of the old confidence in the integrity of big business, a boom in the stock market, and quick regime changes in Iraq and elsewhere," said Saul H. Hymans, professor of economics.

"Rather, our forecast is based on a scenario in which things aren't quite as bad as we've been fearingno major new corporate scandals, the jobs outlook stabilizes, profits improve slowly, things get temporarily dicey in Iraq as the inspections become more intrusive, but no big blow up."

In their annual forecast of the U.S. economy, Hymans and colleagues Joan P. Crary and Janet C. Wolfe predict that national economic output, as measured by real Gross Domestic Product (GDP), will expand at a rate of 4 percent as early as the middle of next year and will remain at that rate in 2004matching the average growth rate for 1995—2000.

The state economy should start to warm up again as early as next spring, U-M economist George A. Fulton, along with Crary and Hymans, predict in their annual forecast of the Michigan economy.

The forecasts were presented Nov. 21­22 at U-M's 50th Anniversary Economic Outlook Conference.

On the whole, the U.S. economy will expand by 2.5 percent in 2003, due to slow economic growth expected in the early part of the year, the national study predicts. The rate is similar to this year's projected GDP growth of 2.3 percent, which is still considerably higher than the 0.3 percent rise posted last year.

Falling unemployment, moderate inflation and low, but slowly increasing, interest rates will accompany the rise in economic growth after the middle of next year, the forecast shows.



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