News Release

Despite worriers, U.S. economy still
doing quite well, UNC expert says

By DAVID WILLIAMSON
UNC News Services

CHAPEL HILL – The U.S. should continue to set new records for overall economic activity for several more years, University of North Carolina at Chapel Hill business expert James F. Smith says. Another recession will come along one day, of course, but that’s not happening anytime soon.

"While some pundits insist on worrying about an economic calamity, it seems to be way too early to be concerned," Smith said. "It’s a waste of time to worry about a recession now."

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.

This year’s college graduates are finding it easy to get jobs on all levels, Smith said. "That’s a huge and most welcome contrast to the previous four years."

Real gross domestic product could see a 3.9 percent increase this year over 2004, he said. In 2006, it should rise to 4.4 percent.

"That should result in more records being set for corporate profits and that should help both business fixed-investment and stock prices," Smith wrote. "The U.S. is in a ‘virtuous cycle’ right now with rising employment, incomes and industrial production. This will also result in increases in revenues to governments at all levels."

The retail sector, which set a record last year, seems off to an even better performance this year, Smith said. Total retail and food service sales during the first four months of 2005 were $1.29 trillion, an increase in 6.5 percent from the same period in 2004.

Among retailers doing better business overall were gasoline sellers – chiefly because of the gasoline price rise, motor vehicle and parts dealers and suppliers of building materials and garden equipment.

Construction remains a major driving force for the economy, he said.

"Total construction expenditures in the U.S. have been running at a seasonally adjusted annual rate in excess of $1 trillion. This represents about 12.5 percent of the GDP and is an unprecedented level of activity in this important sector of the economy."

Total construction spending on residential properties will set a record in 2005, Smith said. During the first three months of 2005, construction spending was $222.4 billion, which was "up an enormous 9.3 percent from the first quarter of 2004."

Gas prices probably will come down further soon, and inflation is unlikely to be a problem, he said.

"There is no doubt that many individual workers in the U.S. have lost their jobs due to increased competition from producers in other countries," Smith said. "However, the best solution for these people is not raising tariffs to make consumers pay more for the goods and services they want. Much research by reputable economists over many years has shown that the cost to consumers of protecting a job in an industry such as auto, steel or textiles is about double the income of the worker."

The United States should stop treating China as an adversary, Smith said. Encouraging economic and political progress in that populous Asian nation would pay dividends, whereas attacking them on economic issues does not.

Pressuring China to let its currency float in value in relation to the dollar is one example of China "bashing," he said. Since its overall trade balance is close to zero, it’s not clear whether their currency would appreciate or depreciate in value.

"This means the renmimbi (RMB) could easily decrease in value, which would infuriate critics in the U.S. and Europe," Smith said. "If the value of the RMB were to rise by 10 percent or more, the Chinese financial system would collapse. It is hard to see why U.S. policymakers think that would be a desirable outcome."

The U.S. Senate is working on a bill that would impose 27.5 percent tariffs on all Chinese imports if officials there don’t allow the RMB to float, he said. "Over 60 senators have indicated support, so this is clearly a bill to watch carefully to make sure it does not pass."

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

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