NEWS

By DAVID WILLIAMSON
UNC News Services

CHAPEL HILL -- The United States economy is steadily graining strength, a University of North Carolina at Chapel Hill business expert says.

"Employment should increase by well over 2 million net new jobs in 2003," said Dr. James F. Smith, adjunct professor of business administration at UNC’s Kenan-Flagler Business School. "That will generate demand for office space and enhance overall economic activity."

Nearly all forecasters anticipate continued low interest rates, Smith said. Such rates encourage consumption by individuals and investment by business firms. Both will give a big lift to the economy and to commercial real estate in the year ahead.

Smith, rated by the Wall Street Journal as the nation’s most accurate economic forecaster in three of the past five years, made his remarks in the latest issue of the Business Forecast, a newsletter he writes for the school.

"In sharp contrast to the last three months of 2002, when the U.S. economy encountered what Federal Reserve Board Chairman Alan Greenspan has called a ‘soft patch,’ the economic data coming out in 2003 have been almost uniformly more positive," he said. "The first glimmer of good news appeared on January 2 when the Institute for Supply Management (ISM) issued its widely followed ISM Manufacturing Report On Business, (which) has an excellent track record for predicting the economy."

The December index was 55.2 , said Smith, who directs the Kenan Institute for Private Enterprise’s Center for Business Forecasting. Any number above 50 indicates that the manufacturing sector is expanding and any number above 42.7 indicates that the entire economy, as measured by real gross domestic product (GDP), is growing. While the January index dipped slightly, it still indicated strong growth both in manufacturing and the overall economy, and it has now shown economic growth for 15 months.

In the fourth quarter of 2002, total U.S. personal income exceeded $9 trillion at a seasonally adjusted annual rate for the first time, he said. That was up 4.4 percent from the fourth quarter of 2001 and was extremely good news.

Total retail sales reached an all-time record in 2002, Smith said.

"Despite incessant reports that the Christmas shopping season was ‘disappointing, dismal, weak, well below plan’ or some other equally erroneous or stupid description, it turned out to be the best one ever in both total volume and in dollar terms, as reported (by) the Bureau of the Census," he said. "Another piece of good news was that the national unemployment rate fell to 5.7 percent in January. It was 6 percent in December."

More than 137.5 million people were employed in January, an increase of 1.75 million, or 1.3 percent, from January 2002. Also, the residential housing sector continued to boom, setting new records for single-family home sales and housing starts and home ownership. A significant slowdown in housing activity in 2003 is unlikely.

President Bush, whose tax cut proposals should spur the economy, and those who comprise the first Republican majority in Congress in 50 years know what they have to do to be re-elected in 2004, Smith said.

"They must deliver an economy performing so well that you will want to return them to office," he said. "They will succeed. Plan on 4.2 percent real GDP growth in 2003 and 3.8 percent in 2004. If President Bush’s tax proposals are enacted by July 1, then raise these numbers significantly. Real GDP growth should average 3.5 percent a year from 2005 to 2010 when the next recession should arrive."

The UNC professor said that while it is not likely, his personal preference would be to repeal the entire income tax, corporate and personal, and then the 16^th Amendment, which authorized federal income taxes.

"We could replace it with a flat tax on spending and improve economic efficiency hugely," Smith said. "The President’s Council of Economic Advisers proposed precisely this sweeping reform in its annual report released on February 7."

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

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

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