UNC expert: robustness of economy continues to exceed all expectations

June 13, 2000

CHAPEL HILL -- Nearly all economic forecasters expect the pace of real gross domestic product growth in the United States to slow down from the more than 5 percent annual rate of the first quarter, a noted business expert says. But the overwhelming consensus among them is that 2000 still will be the best year for growth since the current economic expansion began in March 1991.

"There is a lot of momentum in the economy, and we started off from such a high level that it would take some huge shock to prevent this year from being the best growth year since 1984," said Dr. James F. Smith of the University of North Carolina at Chapel Hill.

"It seems very unlikely that a collapse in stock prices will trigger a huge problem for the economy," Smith said. "It seems equally unlikely, if not more so, that some steep drop in the value of the dollar could scare international investors into dumping U.S. assets and converting dollars into currencies that look more attractive."

Finance professor at UNC-CH's Kenan-Flagler Business School, Smith describes the national economic outlook in the June issue of "Business Forecast," a newsletter he writes for UNC-CH. Three times in the past five years he was the nation's most accurate economic forecaster, according to The Wall Street Journal.

This year should be a great one for the U.S. economy, the professor said. He predicted a 4.7 percent increase in real gross domestic product, the value of all goods and services produced here after eliminating inflation. Many other reputable forecasters predict an even higher rate, and GDP growth has exceeded 4 percent since 1997.

Smith said inflation, as measured by the Consumer Price Index, will drop slightly this year and return to 3 percent to 3.4 percent consistently early next year. Also, next year will see further interest rate increases by the Federal Open Market Committee, the Federal Reserve System group that sets monetary policy.

"My current forecast remains that the next recession will begin on May 16, 2002," he said.

The exact time is because that's when the Federal Reserve Board is scheduled to release data on industrial production, he said. He chose the date for technical and historical reasons and because of the political economic cycle.

"If current political polls are to be believed, an extremely dubious proposition, but one quite germane at this point, then Gov. George W. Bush of Texas will be inaugurated as president on January 20, 2001," Smith said. "Since every Republican president in the 20th century has brought us a recession in the first half of his first term, it seems logical to expect President Bush to continue this tradition into the 21st century."

The stock market is certain to take some hits, he said, but stocks will remain attractive investments well into this century because they generally go up more than inflation does.

"Investors need to be regularly reminded that 'no known tree has ever grown to the sky,' as well as that risk and reward are related," the financial expert wrote. "You should always make sure that you do not violate the sleep test. If you have trouble going to sleep because you worry about your stock market investments, then you have too much money in the market. No one should ruin their health because of their investment strategy."

The recession in 2002 will result in a drop in real GDP of 0.3 percent, which is almost exactly the same as the decline in 1990, he said. The recovery, which will begin on February 14, 2003, should lead to real GDP growth averaging 3.5 percent a year over the ensuing decade. "That's not a bad outlook," Smith said. "Meanwhile, enjoy the record levels of economic activity this year."
-end-
June 14, 2000 -- No. 333

Note: Smith, who is in Europe until June 19, can be reached via email at j_smith@unc.edu. Afterwards, he can be reached at 703-799-9685 or 919-962-3176. As time allows, he's willing to discuss most economic issues with reporters.

By DAVID WILLIAMSON UNC-CH News Services


University of North Carolina at Chapel Hill

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