Next Year, U.S. Economy Will Amaze, Business Expert At UNC-CH Predicts

December 11, 1998

CHAPEL HILL - From 1994 to 1996, the U.S. economy was like Baby Bear's porridge in the Goldilocks story, "not too hot, not too cold, but just right," according to a University of North Carolina at Chapel Hill financial expert. For the past two years, it has been "awesome," he says.

"For 1999, the word to describe the U.S. economy will be 'amazing' as we watch any number of economic records be pushed to new previously unseen levels," wrote economist Dr. James F. Smith in the December issue of "Business Forecast," his bimonthly newsletter. "My optimism about the future of the U.S. economy has not foundered since we began to recover from the depths of the recession that ended on Nov. 15, 1982."

The subsequent performance of the economy and, not coincidentally, the stock market has proven that optimism well-founded, Smith said.

Professor of finance UNC-CH's Kenan-Flagler Business School, Smith regularly lays himself open in the newsletter to the slings and arrows of those who think his predictions are written through rose-colored glasses.

"Many people snickered in early September (about) my forecast that the stock market would set new highs this year after steep declines from the July records," Smith said.

"One money manager in Florida even sent me a 10-page paper full of dire predictions with a cover note chastising me for being insufficiently concerned about the downdraft on the U.S. economy coming from Asia, Russia, Brazil and Venezuela," he said. "Let's hope he had his clients back in the market before the great Thanksgiving rally that sent all the major indices - the Dow Jones Industrial Average, the Standard & Poor's 500 and the NASDAQ - to new record highs."

The broad-based Wilshire 5000 index, which was up $2.4 trillion in 1997, was up another $1.5 trillion in the year ending Nov. 27, Smith wrote. That should add $50 billion to consumer spending for the holiday season.

"Retailers all over the U.S. are smiling as Christmas shoppers turn out in record numbers with more money to spend than ever before," he said. "The rate of increase in personal consumption expenditures has surpassed all forecasts for the past year and will certainly do that again this quarter."

On Nov. 24, the Bureau of Economic Analysis of the U.S. Department of Commerce released data showing the real gross domestic product (GDP) grew at a seasonally adjusted annual rate of 3.9 percent in the third quarter, Smith said. GDP is the total value of all final goods and services produced in this country after eliminating the impact of inflation.

Real personal consumption expenditures grew at a seasonally adjusted annual rate of 4.1 percent in the third quarter, the professor wrote. That was lower than the 6.1 percent posted in the second quarter, "but still a very healthy performance."

The outlook is extraordinarily good, Smith said. U.S. banks are lending money, the stock market is setting new records and consumer confidence has rebounded sharply. Employment is at record levels and rising, and incomes are rising throughout the country.

"My forecast is for 2.5 percent real GDP growth in both 1999 and 2000," he said. "Then growth will slow to 1.6 percent in 2001 as inflation picks up. This will lead to a recession in 2002...and a 0.3 percent decline in real GDP. We should return to growth in 2003 and keep it up for another decade before we see another recession."
Note: Rated the nation's most accurate economic forecaster by the Wall Street Journal in 1996 and the second-most accurate by Business Week in 1997, Smith is a frequently quoted financial expert and teacher known for his clarity, wit and common-sense approach to economics. He can be reached at 919-962-3176. As time allows, he's willing to discuss most economic issues with reporters.
Contact: David Williamson, 919-962-8596.

University of North Carolina at Chapel Hill

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