News Release

By DAVID WILLIAMSON
UNC News Services

CHAPEL HILL – Good news and bad news loom for the U.S. economy, a University of North Carolina at Chapel Hill business expert says. In the near-term, the outlook is excellent. Down the road, however, the picture won’t be so rosy, especially with baby boomers straining Social Security, Medicare and Medicaid.

"We will have a record Christmas shopping season," says Dr. James F. Smith, professor of finance at UNC’s Kenan-Flagler Business School. "Retailers will complain first that they fear low sales for the year. Then, after they realize that it is another record shopping season, they will complain that the increase over last year isn’t big enough. Of course, they always complain about that."

On Nov. 12, the Census Bureau released data on retail and food service sales for October, Smith said. Those were $342.1 billion on a seasonally adjusted basis, up a strong 7.6 percent from October 2003.

"For the first 10 months of 2004, total retail and food services sales were $3.3 trillion, also up 7.6 percent from the first 10 months of 2003," he said. "Sales excluding motor vehicles and parts were $2.5 trillion, up a terrific 8.8 percent from the first 10 months of last year."

Employment data released by the Bureau of Labor Statistics on Nov. 5 were exceptionally strong, Smith said. Total nonagricultural employment grew by 337,000 jobs in October, the biggest increase since March 2000. In addition, the numbers for both August and September were revised upward.

Payroll jobs have increased by 2,228,000 since August 2003.

Smith, 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 the business school.

"We are now down only 490,000 payroll jobs from the March 2001 peak," he said. "We should surpass that by the end of the year.

"So sit back, relax and get ready for more good economic news in 2005," the professor said. "We should experience real GDP growth of 4.5 percent this year and average 4.2 percent a year through 2008. That would make those the best five years for the U.S. economy since 1962-1966."

Smith said the next recession likely won’t arrive for five years.

Now is the time to fix Social Security, Medicare and Medicaid, he said.

"Any person who doubts the impending crisis in Social Security is not well-informed," Smith wrote. "You can look at analyses done by the Congressional Budget Office at www.cbo.gov, by Rudy Penner and Eugene Steurle of the Urban Institute at www.urban.org, or by the Social Security Reform Center at www.socialsecurityreform.org."

Two big problems will damage Social Security, he said. The first is that the retirement age for full benefits is only slowly being raised to 67. That age needs to be raised not only higher but faster as well. The second problem is the regular cost of living adjustment, which the government can only guarantee by raising the payroll tax rate of current workers.

"For many years now, it has been evident that the number of people collecting benefits is rising far more rapidly than the number of people paying into Social Security," Smith said. "When the baby boomers start collecting full benefits beginning in 2012, the U.S. is on a path to have only two people working to pay for each person collecting. That won’t work very long."

Fixing Medicare and Medicaid is even more important and will be a much more difficult task, he said.

"Medicare is an especially tricky problem," Smith said. "We now spend $288 billion a year on it, and half of that is spent in the last six months of life. Obviously, educating people as to the importance of living wills would help a lot. This would limit highly expensive life support expenditures in the last few weeks of life."

Medicaid is the fastest rising state expenditure, according to a report issued by the National Association of State Budget Officers on Oct. 26, he said. State spending on Medicaid was $259 billion in fiscal 2004 or 21.9 percent of total state spending. Education for K-12 was only 21.5 percent of state spending.

"There really are no obvious solutions to Medicaid spending," Smith said.

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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