News Release

By DAVID WILLIAMSON
UNC News Services

CHAPEL HILL -- As a self-described congenital optimist, University of North Carolina at Chapel Hill business expert James F. Smith says he enjoys watching purveyors of economic gloom and doom as they regularly discover their dire predictions "to be grossly incorrect as awkward facts come to light."

"During 2004, for example, most analysts, commentators and media pundits, referring to the U.S. and world economies, fed the American public a nearly unrelenting diet of bad news and pessimistic forecasts," Smith said. "But now look at the facts. The world economy turned in its best performance in 29 years."

That was despite low growth in Japan and such "Euro Zone" countries as Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain, he said.

"These laggards were more than offset by stellar performances by China and most of the rest of the Asia-Pacific region outside of Japan, as well as Canada, Mexico, the U.S. and Argentina," Smith said. "Increases in world trade to record levels above $10 trillion -- about $8 trillion of goods and $2 trillion of services -- contributed a great deal to this outstanding growth record in 2004. Trade will add a lot to global output in 2005, too."

The UNC professor, rated by the Wall Street Journal as the nation’s most accurate economic forecaster in three of the past nine years, made his remarks in the latest issue of the Business Forecast, a newsletter he writes for UNC’s Kenan-Flagler Business School. He is a fellow in the Kenan Institute of Private Enterprise and director of the institute’s Center for Business Forecasting.

Real gross domestic product (GDP) grew by 4.4 percent in the U.S. in 2004, according to the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce, Smith said. This was the strongest growth performance for the U.S. economy since 1999 and one of the three best growth years since 1984.

"Productivity growth is the single most important economic variable in any capitalist, free-market economy," he said. "That’s because that’s the only way to make the size of the economic pie larger."

Labor productivity is defined as output per worker or output per hour worked, Smith said. In March, the Bureau of Labor Statistics reported that labor productivity growth in the non-farm business sector was 4.3 percent in 2002, 4.4 percent in 2003 and 4.0 percent in 2004.

It turns out that over the past decade, the U.S. has had both the highest absolute level of productivity in the world as well as the highest growth rate, he said. This has already made the U.S. the world’s largest exporter and the lagged effects of the decline of the dollar in 2003 and 2004 should lead to a large increase in exports in 2005.

"This is the best three-year growth in labor productivity since at least 1900," Smith said. "No one predicted productivity growth this high, but the benefits are enormous."

Employment and industrial activity should both grow steadily throughout 2005, he predicted. Corporate profits and the stock market should rise as well. Good news also has come from manufacturing and housing and should come soon in the form of lower oil prices.

All of these factors will result in the U.S. economy posting another strong performance in 2005, Smith said.

"My forecast is that we should see 4.2 percent real GDP growth with stable long-term interest rates, relatively low inflation, and rising employment, income levels, retail sales and industrial production," he said. "It should be a wonderful year."

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Note: Smith can be reached at (919) 968-9995 or smith.jf@mindspring.com 

Kenan-Flagler contact: Kim Spurr, (919) 962-8951

News Services contact: David Williamson, (919) 962-8596