NEWS

Leading forecaster says economic outlook
good, but problems loom down the road

By DAVID WILLIAMSON
UNC News Services

CHAPEL HILL -- Economic forecasters overwhelmingly agree that 2004 will see the U.S. economy post its highest growth since the 7.2 percent increase in 1984, which was the highest since the post-World War II growth records set in 1950 and 1951, a University of North Carolina at Chapel Hill business expert says. All it will take is at least a 4.6 percent increase in real gross domestic product.

Despite that good news, many consumers and business and media observers still seem to think either that the economy is poor or that it will soon worsen, says Dr. James F. Smith, professor of finance at UNC’s Kenan-Flagler Business School.

"It is very difficult to understand how these totally erroneous impressions are being formed," Smith said. "Experts think it is because the data from the payroll survey of employment have been so slow to rebound."

Most forecasters also expect this year to be the best for global growth since 2000.

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

"The U.S. should easily achieve real GDP growth of 5 percent this year and 4.2 percent in both 2005 and 2006," he said. "Business investment will grow dramatically, and consumers will carry their share of the load."

One factor propelling business investment is the dramatic rebound in corporate profits, the economist said. They are at the highest levels in 45 years, which should also lead to big increases in hiring.

Most businesses should see record levels of sales or gross revenues and earnings in 2004, Smith said.

"It will be a terrific year for consumers as well," he said. "Big increases in real disposable income per capita drives consumption and will go up a lot in 2004 as a result of the 2001 and 2003 tax cuts."

The UNC professor said people should stop fretting about jobs moving overseas.

"One of the sillier debates going on in the U.S. these days is how much we should worry about jobs being outsourced to India, China or some island in the Caribbean," he said. "These concerns are not only voiced by politicians pandering to clueless constituents but by supposedly savvy business people."

In an economy that’s becoming more globally interconnected every day, it makes sense for companies and other economic agents to strive always to produce whatever goods and services they provide at the lowest possible cost, Smith said. If they purchase some goods and services abroad, that’s is a good thing.

"First of all, the importance of outsourcing jobs is wildly overstated," he said. "Estimates are that at most some 500,000 jobs have been created by U.S.-based entities in foreign countries that might otherwise have been here."

That’s a tiny fraction -- about one-third of 1 percent or .003 percent -- of U.S. employment.

"We seem to be thrilled with outsourcing when it’s in our favor," he said. "No one complains about foreign direct investment in the U.S., whether it’s by vehicle makers, banks, pharmaceutical companies, energy companies, chemical producers or any other type of organization that wants to create jobs here."

The problem seems to be that some white-collar jobs are being outsourced so that there’s an impact on more educated workers that worries some people, Smith said. But the United States will always support knowledge-based jobs.

"We have the world’s best system of higher education including, quite importantly, our community college system," he said. "This is a major reason why we have the world’s most productive workers as well."

The flap over outsourcing will probably die out once payroll employment has posted strong gains for a few months, Smith said. For now, he added, just ignore "all the whining and complaining as the doomsayers will be proven wrong" again.

"The next five years should be some of the best ever for the U.S. economy. Enjoy them while you can because we face huge fiscal problems in 2010 and beyond from the baby boomers’ impacts on Medicaid and Medicare."

Those are the two biggest economic difficulties looming, he said, along with Social Security. Partially privatizing Social Security would help.

Two changes recently recommended by Federal Reserve Chairman Alan Greenspan would also improve the outlook, Smith said. They are raising the retirement age in the future -- with a lag of at least 10 years -- and changing the way annual increases are calculated.

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Note: Smith can be reached at (919) 968-9995 or smith.jf@mindspring.com
Kenan-Flager Contact: Kim Spurr, (919) 962-8951
News Services Contact: David Williamson, (919) 962-8596