Job Gains Will Accelerate in 2004

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BUOYED BY AN UPSWING IN manufacturing and expectations of stronger job gains, the American Bankers Association Economic Advisory Committee (EAC) remained confident of the economy's growth prospects for 2004, according to a report released in mid-January.

The committee's consensus forecast is that the national economy will grow at an annual rate above 4.0% in real terms during 2004. Job growth will accelerate as output gains remain above average and labor productivity growth reverts to a still healthy, but more moderate, pace.

"Productivity growth has been exceedingly strong," said Lynn Reaser, EAC chair, chief economist and managing director, Banc of America Capital Management, St. Louis. "Companies will need to ramp up staffing to meet orders and sales demands as productivity growth moderates to a more sustainable trend."

The committee predicts that monthly job growth will reach 200,000 during the first half of this year.

The EAC believes the Federal Reserve has successfully prevented falling prices. Still, the underlying rate of inflation should remain low because of gains in productivity and significant amounts of excess capacity.

"The major risk of deflation is behind us," said Reaser. "Companies should see a gradual firming in pricing power and the underlying rate of inflation should edge higher slowly, but remain well contained."

Low long-term interest rates will continue to support home buying, building and remodeling for the first half of the year, but this sector will lose momentum as the year proceeds. The committee projects that 30-year fixed mortgage rates will average about 6.75% by the end of the year. Most members of the EAC also predict that the Federal Reserve will gradually raise short-term interest rates in 2004.

"However," said Reaser, "a rate increase is unlikely before midyear."

Recent numbers point to a rebound in the industrial sector and the EAC expects further improvement.

"Manufacturing is benefiting from a rebound in capital spending, the revival in exports, and inventory rebuilding," said Reaser. "Industrial production is likely to rise faster than the overall climb in real Gross Domestic Product."

Sharp changes in either direction in several factors could significantly alter the outcome. These factors include the level of oil prices, geopolitical developments, and trends in the dollar. On balance, EAC members believe the risks are tilted toward stronger growth.

Consumer credit will continue to expand at a moderate pace, the EAC predicted. Meanwhile, commercial loans are expected to grow again in 2004 after three years of decline.

Bank Economists' Review and Forecast *

                                       2003        2003        2004
                                      3RD QTR.   4TH QTR.    1ST QTR.

Gross domestic product (seasonally adjusted annualized growth rate
from prior quarter)

GDP in current dollars                 10.0%        6.0%        6.0%
Real GDP, chain-weighted                8.2%        4.4%        4.6%
Personal consumption                    6.9%        2.7%        3.7%
Nonresidential fixed investment        12.8%       10.0%        9.7%
Residential investment                 21.9%       12.0%        2.0%
Business inventories ($billions)      ($9.1)      $16.5       $39.0

Other business indicators (seasonally adjusted annualized level)

Consumer prices (growth rate)           2. …