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  U.S. economic forecast
America will gain 4 million jobs by the end of next year

The U.S. economy, which finally posted job gains last year after three straight years of losses, will add another 4 million jobs through 2006, say U-M economists.

The economy lost 2.7 million payroll jobs from February 2001 to May 2003 as employers teased more output from fewer workers. By 2004, companies had had enough of this cost-cutting tactic and hired more than 2 million workers last year, says Saul Hymans, professor emeritus of economics.

"Renewed business confidence in the strength of the expansion did the trick and produced a sharp jump in jobs,'' Hymans says. "With solid but no longer extraordinary productivity gains, hiring responds to sustained output growth during 2005 and 2006, producing healthy job gains and a gradual improvement in the unemployment rate. However, job gains in 2005 and 2006 fall well short of the 3 million jobs added per year in the 1994-2000 period."

In their annual spring forecast update of the U.S. economy, Hymans and Joan Crary, assistant research scientist in the Department of Economics, and Janet Wolfe, a lecturer and senior research associate in the economics department, predict employment growth of 2.1 million (nonfarm payroll) jobs this year and 1.9 million jobs in 2006.

Unemployment is expected to fall from last year's 5.5 percent average to 5.3 percent this year and 5.1 percent next year.

The economists say output growth (as measured by real Gross Domestic Product) will back off from the robust 3.9 percent of 2004 to 3.3 percent during 2005 and 3.5 percent during 2006.

"Healthy gains in consumer demand and some rebuilding of inventory stocks pace the growth of real GDP in the first half of this year, but a moderate second-half slowdown results from an easing of residential building and inventory accumulation and net exports take a bigger bite out of the growth rate," Hymans says. "Growth heads back up again in 2006, reflecting somewhat stronger consumption growth and a strong, steady contribution from business capital investment, including commercial and industrial construction."

As job growth rises in the next two years, so too will inflation and interest rates, although they will remain at fairly low levels, Hymans and colleagues say.

The conventional 30-year mortgage rate will average 6.1 percent this year and 6.9 percent next year, after hovering around 5.8 percent the past two years, they predict. The rate for three-month Treasury bills is expected to more than double from 1.4 percent last year to 3 percent in 2005 and 3.8 percent in 2006. The 10-year Treasury bond rate edges upward from last year's 4.3 percent to 4.6 percent this year and 5.4 percent next year.

Core inflation, which was an exceptionally low 1.8 percent in 2004, will rise to 2.2 percent this year and 2.6 percent in 2006, researchers say.

The U-M forecast, which is based on the Michigan Quarterly Econometric Model of the U.S. Economy and compiled by the U-M Research Seminar in Quantitative Economics, also predicts that:

• Oil prices gradually will retreat later this year from the $50-$55 per barrel range expected through mid-year to $47 per barrel by the fourth quarter 2005 and to $38 per barrel by the end of next year;

• Private housing starts will stay strong at 1.96 million units in 2005 and 1.88 million in 2006, following last year's 1.95 million—the highest annual total since 1978;

• Sales of light vehicles will remain steady at 16.7 million units in 2005 and increase to 17 million next year, which would make 2006 the third-best on record.

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