- The Washington Times - Sunday, February 26, 2006


The economy ended 2005 like a lamb and is roaring back like a lion, a resounding rebound that economists say will lead the Federal Reserve to raise interest rates in the months ahead.

The fresh forecast from the National Association for Business Economics predicts gross domestic product (GDP) will grow at a robust 4.5 percent annual rate from January through March.

The group earlier had predicted a 3.4 percent rate. If the revised forecast proves accurate, it would mark the best showing since the July-through-September period in 2003, when the economy expanded at a blistering 7.2 percent pace.

The government in April will release the GDP figure for the first three months of this year. GDP measures the value of all goods and services produced within this country and is the broadest gauge of economic performance.

Growth slowed to a crawl over the final quarter of 2005. The 1.1 percent pace was the most sluggish in three years. Blamed for the slowdown were the lingering fallout from the Gulf Coast hurricanes and belt tightening by consumers and businesses.

“Our forecasters expect the economy to shake off the effects of last year’s hurricanes and surging oil prices,” said the association’s president, Stuart Hoffman, chief economist at PNC Financial Services Group.

The forecasters predict this robust growth will lead the new Federal Reserve chairman, Ben Bernanke, and his central bank colleagues to raise interest rates at least twice more this year.

Mr. Bernanke will preside over his first interest-rate meeting March 27 and 28.

For nearly two years, the Fed has tightened credit to keep the economy and inflation on an even keel. The most recent rate increase was announced Jan. 31, at Alan Greenspan’s last meeting as Fed chairman.

The federal funds rate, a key interest rate controlled by the Fed, now stands at 4.5 percent, the highest in nearly five years.

Economists, including some who had been uncertain about the direction of rates, now say this rate will climb to at least 5 percent this year. After that, analysts say, the Fed probably will leave rates alone for a while.

In 2007, however, the forecasters predict the Fed will start lowering this rate gradually.

For all of 2006, the forecasters expect the economy to grow by 3.3 percent. That would be a solid performance, but slightly below the 3.5 percent increase in GDP in 2005. Economic growth in the first half of this year is expected to be better than the second half.

The economy should expand by a respectable but slower 3.1 percent in 2007 as the toll of higher borrowing costs, a slowing housing market and elevated energy prices is felt, the association said.

In terms of risks to the economy, forecasters rank rising energy prices as the biggest threat. Rising interest rates and falling home prices were other potential risks.

Long-term interest rates, such as mortgages, have stayed at relatively low levels in the United States even as the Fed has boosted short-term rates.

If these long-term rates were to jump sharply or if housing prices, which have risen rapidly, were to fall, it could spell trouble for the housing market, overextended homeowners and the overall economy.

On energy prices, the forecasters expect a barrel of crude oil to trade at nearly $59 at the end of this year. That is higher than an earlier estimate of $53 a barrel, but below the current level of about $63 a barrel.

The economists see inflation calming this year, with consumer prices expected to increase by 2.9 percent this year and 2.4 percent next year. That would be an improvement from last year’s 3.4 percent jump, the biggest in five years.

On the jobs front, solid economic growth should help lower the unemployment rate this year. The unemployment rate, which averaged 5.1 percent last year, should drop to 4.8 percent this year, the association said. The jobless rate should edge up to 4.9 percent in 2007, according to the forecast.

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