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Updated 11:00 AM November 24, 2003



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Economic forecast
Growth of 5 million jobs in next two years predicted

Riding the wave of recent job gains and robust economic growth, the American economy should remain strong throughout 2004, according to a new economic forecast by the University.

Economists predict 5.1 percent growth in national economic output, as measured by real Gross Domestic Product (GDP), next year—the strongest annual growth rate since 1984.

U-M economists predict 5.1 percent growth in national economic output next year.

"The economy starts the year 2004 with substantial momentum, propelled by real GDP advancing at a 5.8 percent rate in the second half of 2003," says Saul Hymans, professor of economics. "The pace of output expansion remains vigorous next year, and employment responds to the strong economic growth."

In their annual forecast of the U.S. economy, Hymans and colleagues Joan Crary and Janet Wolfe predict employment growth of 2.1 million jobs in 2004 and 3.1 million in 2005. Unemployment is expected to fall from 6 percent this year to 5.4 percent next year and to 4.8 percent in 2005.

"The past three months have produced 286,000 new payroll jobs—the best three-month performance since January 2001, back before the recession," Hymans says. "And in response to three straight quarters of really sparkling economic growth, job gains move into high gear to generate more than 800,000 jobs in the first quarter of 2004 and remain strong over the next two years."

While the outlook on the employment front is positive for 2004 and 2005, inflation and interest rates will edge upward in the next two years, Hymans and colleagues say.

Core inflation remains low for another year, but rises slightly from 1.5 percent this year to 1.8 percent next year, before jumping to 2.7 percent in 2005, the report predicts.

"Interest rates move up slowly during 2004, but somewhat more intensely in 2005 as the Federal Reserve responds to the gathering inflationary momentum," Hymans says.

The conventional mortgage rate will rise from 5.8 percent this year to 6.1 percent in 2004 and to 6.3 percent in 2005. The rate for three-month Treasury bills will increase from 1 percent this year to 1.6 percent next year and to 3.2 percent in 2005, while the 10-year Treasury bond rate moves up from 4 percent in 2003 to 4.7 percent in 2004 and to 5 percent the year after.

The forecast is based on the Michigan Quarterly Econometric Model of the U.S. Economy and compiled by the U-M Research Seminar in Quantitative Economics. It also calls for declining energy prices, fewer private housing starts, rising sales of light vehicles and higher consumer-spending growth.

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