Front Page	E-mail PagePrint Version

Public, private-sector economists view a ''limited impact'' of oil prices

WASHINGTON, DC - 12/22/04 - The US economy is expected to continue to grow at a solid pace in 2005 and be a major contributor to global growth, according to private and government economists, reports the Washington File.

The Bush Administration forecast issued last week said that US gross domestic product (GDP) will grow at a real, inflation-adjusted rate of 3.5% next year, the same rate projected by the International Monetary Fund (IMF) in September.

This compares to a 2.3% rate for Japan and 2.5% for the European Union forecast by the IMF.

Private forecasts for US economic growth in 2005 range from 3.0% to 4.5%, a slight dampening from expected growth of 3.5% to 4.5% in 2004. Strong growth this year was driven by business investment, which more than compensated for a more recent slowdown in consumer spending, they said.

Although the Administration, international organizations and some private economists forecast slower US economic expansion next year, a number of private economists offer a less guarded outlook.

Brian Wesbury, the chief economist at the investment bank Griffin, Kubik, Stephens & Thompson Inc. in Chicago, said that after 13 quarters of continuous growth the US economy still has the potential to expand at a "rather healthy clip."

"My belief is that all systems are 'go' - or remain 'go'," he said in a recent interview with the Washington File.

Wesbury said US economic expansion "is likely to be driven by continued robust business investment," a pickup in private consumption and growing exports.

"As imports become more expensive due to a drop in the value of the dollar, the trade deficit, growing recently, will begin to move down," he said.
 
"I am not projecting a huge reversal" in the trade deficit, he said. "But it doesn't take much - $15-20 billion improvement in the trade balance every quarter - and you can begin to add a half a percentage point or a percentage point to growth," he added.

Another economist, Nariman Behravesh, the chief economist at Global Insight, a Waltham, Massachusetts-based business and economic consulting firm, is more cautious.

Although he shares the view that the US will sustain a high level of economic activity, Behravesh said in a recent interview that he believes growth "is likely to be slowed down by higher energy costs, higher short-term interest rates and the gradual expiration of the fiscal stimulus measures adopted early in the Bush Administration."

However, he expects the slowdown to be a moderate "downshift" and not a "slump."

One of the major economic worries of 2004 - that rising oil prices would bring the global and US economy to the brink of a slump - has never materialized.

Public economic debate on the issue has reflected fears that the world might face another energy crunch similar to the oil crises of the 1970s and the early 1980s. Those concerns have been unfounded, both economists said, because economic studies, particularly those done by the International Energy Agency (IEA), indicate a rather modest impact of oil prices on output and inflation.

Behravesh said that current oil prices adjusted for inflation are about half of what they were in the early 1980s and industrialized countries are using only about half as much energy per GDP unit as they were using 25 years ago. As a result, the global experience with rising energy costs in 2004 has been less painful, he said.

Wesbury said that the general US economic environment also is more favorable than in the early 1980s - tax rates are lower, short-term interest rates are being raised at a more measured pace, and productivity is growing in contrast to stagnant productivity growth at that time.

"All of these together mean that our economy can absorb higher oil prices much more efficiently and without the same kind of overall macroeconomic damage we saw then," he said.

Wesbury views the possibility of a terrorist attack as a greater risk to the economy than oil prices. But looking at the experience of Israel, which has learned to live with terrorist threats, he believes that the US economy could "make its way through" with only slightly reduced growth if such an attack occurred and had a reasonably limited scope.

Behravesh shares that view.

He said that the US economy has proven its resilience in recent years and could probably survive a big shock - whether another terrorist attack or a crash in the value of the dollar - without heading into recession.

Even though terrorism-related uncertainties have been present in the US economy since 9/11, the risk of inflation materialized in 2004 after a near-absence of four years.

In 2004, the Federal Reserve, the US Central Bank, started raising key short-term interest rates for the first time since 2000 in response to growing inflationary pressures.

However, Behravesh discarded concerns over a possible sharp rise in inflation in 2005. Although the Federal Reserve is expected to continue pushing rates up, it is likely to stick to a "measured" approach, he said.

Nevertheless, the impact of higher rates might be felt beyond US borders, said Behravesh.

He said short-term interest rates in emerging markets are likely to rise because their movements tend to correlate with those in the US.

Monetary authorities in such countries, particularly those in Latin America, which are among the largest borrowers, might feel pressured to raise short-term interest rates to keep investors from opting for safer US assets, he said. And higher interest rates will somewhat dampen economic growth in that region.

"This is not a crisis scenario, however, just a bit slower growth," he said.

But Barry Bosworth, an economist at the Brookings Institution, the Washington, DC-based research think tank, does not believe that rising US short-term interest rates will have a major effect on other countries.

Instead, market watchers should look at long-term interest rates that are the ones with the highest impact on economy, he told the Washington File.

So far, there is no reason to worry, he added. The bond market has reacted very calmly to the Federal Reserve's move to a more "neutral" policy position. At the time the bank started raising rates again, the federal funds rate - the rate banks charge one another for overnight loans - was at 1%.
 
"For the most people in the bond market, it has been reassuring to see a return of the US monetary policy to normality," he said.

That does not mean that rising short-term interest rates will not have effect on long-term interest rates in the future, he said.

But he added that US monetary policymakers are likely to raise short-term interest rates as long as they do not see a significant impact on long-term rates.

Go back, or read the latest Front Page stories:

Judge Bars Limits on Imports of China Apparel, Textiles

01/02/05 – The ruling found that the retailers and importers who make up the membership of the US Association of Importers of Textiles and Apparels (USA-ITA) have ''suffered, and will continue to suffer, irreparable injury'' if the quotas are put in place; in a slap at US textile and apparel producers, the judge also said the US retailers opposing the quotas ''raised sufficiently serious and difficult questions regarding the propriety'' of the government's proposed actions.