- The Washington Times - Wednesday, December 31, 2003

The massive stimulus put in place by the Bush administration, Congress and the Federal Reserve last year is expected to keep the economy growing strongly in 2004, at least through the November elections.

But economists say a big question remains after the jolt fades from $150 billion in tax cuts in the first part of the year and the initial boost from a 40-year low in interest rates: Will the recovery continue, and will growth be strong enough to create jobs that put millions of Americans back to work?

“As 2003 ends and 2004 begins, we find ourselves at a point where the performance of the economy is about as good as it gets,” said John Makin, a resident scholar with the American Enterprise Institute.

Economic growth hit a sizzling annual rate of 8.2 percent in the third quarter and productivity soared, while inflation and interest rates remained low. The stock market posted a 25 percent gain for the year.

Mr. Makin credits policies of the central bank, President Bush and the Republican-led Congress for helping to nudge the nation’s economy out of a stupor. But he questions how well the economy will perform if and when the pro-growth measures are withdrawn — particularly if the Fed starts to move interest rates back up in mid-2004, as many on Wall Street expect.

“The somewhat disquieting fact is that we have yet to see a sustained period of U.S. growth much above 3 percent in the absence of extraordinary policy stimulus,” he said. This is because the economy is still recovering from the aftermath of the 2000 stock market bubble and investment boom that left the world with too much capacity to produce goods and too few buyers.

Growth would have to approach 5 percent this year to create enough jobs to keep up with the natural growth of the work force, assuming that productivity, or output per worker, moderates from last year’s hyperactive pace of 4.3 percent to less than 4 percent, he said. Job growth has averaged less than 100,000 a month since the summer because of the rise in productivity.

Economists expect growth to average around 4 percent this year, up from about 3 percent last year, as stimulus kicks the economy into a higher gear. Many also expect job growth to pick up this year, leaving behind two years of growth without jobs.

“It would be difficult to raise productivity gains to a higher plateau,” so businesses will have to start adding jobs, said Sung Won Sohn, chief economist with Wells Fargo & Co., explaining why he expects the recovery to broaden in 2004.

“The U.S. economy appears to be on the threshold of a genuine economic expansion, with gains in both jobs and profits,” said Lynn Reaser, chief economist at Banc of America Capital Management. “The combination of low interest rates, tax cuts, a weaker dollar and lean inventories has restarted the U.S. economic engine.”

Gail Fosler, chief economist at the Conference Board in New York, expects growth to jump to 5.7 percent this year in what would be the economy’s best performance in two decades. She expects businesses to create 1 million new jobs after cutting nearly 3 million in the last three years. The increased incomes will fuel an upsurge in consumer spending, she said, while soaring profits will feed a boom in business investment after years of retrenchment.

Ed Yardeni, chief investment strategist at Prudential Securities, said the economy is experiencing the “classic rerun” of the presidential election cycle in which pump-priming by the president and his party produces a boom in economic growth and the stock market in the year before the election.

“The Bush administration is doing everything that is legally possible to win a second term for the president,” he said. “They’ve cut taxes for just about everyone. The president hasn’t vetoed a single spending program passed by Congress. He is about to significantly expand government spending on health care with a new drug prescription benefit program for senior citizens.”

While those measures are producing the expected growth spurt, Mr. Yardeni said, they also are generating budget deficits approaching $500 billion a year and a sharply weaker dollar that is curbing Americans’ purchasing power overseas.

“The only obvious losers from the Bush administration’s aggressive re-election drive seem to be foreign investors, and they don’t vote in the U.S. presidential election,” he said. Those investors have been driving down the foreign exchange value of the dollar, however.

Richard Berner, chief U.S. economist with Morgan Stanley, said the “payback” for strong growth bought with federal borrowing in 2004 will come during 2005.

“By 2005, the effects of fiscal stimulus will have begun to fade,” he said. “Tax-based incentives for business investment expire at the end of 2004.” Meanwhile, he said, huge deficits will start to push up inflation and interest rates.

“Whoever wins the election will need to reconcile the conflict between stubbornly high government deficits and daunting infrastructure and social needs,” including the looming retirement and medical needs of the baby boom, he said. “A major shift in fiscal policy will become more urgent than it was in the mid-1980s.”


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