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Economists Raise 2005 U.S. GDP Forecast
Mon Feb 14, 2005 06:13 PM ET
By Andrea Ricci

NEW YORK (Reuters) - Economists have raised their forecasts for economic growth in 2005 on expectations for stronger consumption than in the prior survey, according to a survey by the Federal Reserve Bank of Philadelphia.

Forecasters also saw a slight increase in inflation and short-term interest rates.

The 36 forecasters surveyed now expect growth to average 3.6 percent in 2005, up from an estimate of 3.5 percent in the previous quarterly survey, the Philadelphia Fed said on Monday.

In their first look at 2006 for this survey, the forecasters projected growth of 3.4 percent.

The United States grew about 4.4 percent in 2004, its biggest annual gain since 1999.

An expectation for stronger consumption in 2005 helped lift the forecast, said Tom Stark, a manager in the economics research department at the Philadelphia Fed.

"Also, while the analysts surveyed have been looking for residential investment to fall for some time, it seems to be staying remarkably strong," he said.

According to those surveyed, while business investment also was expected to continue at a robust pace, "... they have ratcheted down their forecasts a bit," Stark said.

Net exports would contribute a bit more to growth, but only in the latter part of 2005, he added.

The forecasters also raised their forecast for inflation slightly. They now predict inflation to average 2.3 percent in 2005, up from 2.2 percent in the previous survey. They predicted inflation would hold steady at 2.3 percent in 2006.

The Philadelphia Fed's Survey of Professional Forecasters is produced quarterly.

The analysts forecast the unemployment rate would average 5.2 percent in 2005, just a bit below their previous estimate of 5.3 percent, and would fall to an annual average of 5.0 percent in 2006.

The jobless rate was 5.2 percent in January, its lowest reading since a 5.0 percent rate in September 2001.

The growth in non-farm payrolls was expected to average 1.6 percent on an annual average basis, down a bit from the previous estimate of 1.7 percent. The forecasters also see job gains at an annual rate of 1.6 percent in 2006.

That translates into a average increase in non-farm payrolls of 174,000 per month in 2005 and 178,000 in 2006.

For an expansion to sustain itself, the economy needs to generate monthly job gains of approximately 150,000, which is sufficient to absorb new workers entering into the work force and thus maintain a stable unemployment rate.

SHORT TERM RATES TO RISE

The forecasters also raised their projections for short-term interest rates. Short-term rates, as measured by the rate on the three-month Treasury bill, were seen averaging 3.0 percent in 2005. Three months ago, the forecasters were expecting a rate of 2.7 percent in 2005.

The analysts expect short-term rates to rise a full percentage point in 2006 to an annual average of 4.0 percent.

The Federal Reserve has raised its benchmark federal funds rate 1.50 percentage points since last June to wring some of the liquidity out of the financial system and keep inflation at bay. The benchmark federal funds rate is now 2.50 percent.

Despite the higher short-term rates, the analysts have cut their outlook for long-term rates. The rate on the 10-year Treasury bond is now expected to average 4.6 percent in 2005, down from 4.8 percent in the last survey. Long-term rates are seen averaging 5.3 percent in 2006.

Looking over a longer time horizon, the forecasters trimmed their estimates for annual average growth over the next 10 years, even as they left their estimates for productivity growth unchanged.

The forecasters said they expect the United States to grow at an average annual rate of 3.3 percent over the next 10 years, down from their estimate of 3.4 percent in the first-quarter 2004 survey. Productivity is forecast to grow at a 2.5 percent rate.

The Fed survey includes analysts from groups as diverse as Lehman Brothers and Goldman Sachs, the University of Michigan, the U.S. Chamber of Commerce and Verizon Communications.

Source: Reuters

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