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Economists See U.S. Growing 3.1 Percent in 2003
Jan 20, 2003
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Economists have trimmed their forecasts for U.S. growth but still expect the world's biggest economy to expand by about 3 percent this year, around the same as in 2002, as consumers keep spending and businesses use some profits to boost investment, according to a Reuters survey.

Economists estimate the U.S. economy expanded about three percent in 2002, largely due to robust consumer demand boosted by a mortgage refinancing boom which left more people with more money to spend at the end of every month.

Capital spending was the laggard in 2002 but many economists expect companies to start plowing profits into new investments in 2003 after a drought lasting 1 to 2 years.

"We are looking for the recovery to broaden with more capital spending," said Gary Thayer at A.G. Edwards in St. Louis, MO, U.S., who is forecasting growth of 3.4 percent this year.

"Profits are going to look better for a second consecutive year, and because of technology changes, companies have an opportunity to use profits for increasing the productivity of the firm," he said.

In the survey, carried out January 9-13, the mid-range forecast of 25 economists was for the U.S. economy to grow 3.1 percent in 2003. For 2004, the median of 22 growth forecasts was 3.6 percent.

In a similar poll taken in October 2002, economists had forecast growth of 3.3 percent for 2003.

"The consumption story of 2002 will give way to a consumption plus investment story in 2003," said Ken Goldstein at the Conference Board, who is the most bullish with a forecast for 4.1 percent growth this year.

"Companies should start spending some of the profits that started to come back in the second half of 2002 on equipment, catching up on the spending they didn't do earlier because of weak profits, recession, corporate scandals and fears about Iraq," he said.

What happens in Iraq remains a wild card for the U.S. outlook, economists said.

"The uncertainty over Iraq has driven a lot of businesses and households to sit on their hands, and that will be a factor into the early part of 2003," said Stephen Stanley at RBS Greenwich Capital. "If the situation breaks reasonably soon, it would allow for some acceleration in the U.S. economy," he said.

"We're assuming it would be a short war. If we have a prolonged conflict, we would expect U.S. growth to be weaker than forecast," added MR. Thayer at A.G. Edwards.

If a war in Iraq were to spark attacks on U.S. interests, the negative effects on the U.S. economy could be far greater, economists said.

Recent U.S. economic data have not been encouraging. Payrolls dropped sharply in November and December, and retail sales were listless over the holiday shopping season. But most analysts expected the economy to bounce back.

"The consumer is the weakest we've seen in the entire recession, and with the two-month downturn in payrolls, you do have to be concerned about the outlook," said Chris Rupkey at Bank of Tokyo/Mitsubishi. "But it wouldn't take much for the economy to shake off the doldrums. There is too much on the train -- such as tax cuts and interest rates at 40-year lows -- to stop it. It's probably not a good idea to bet against the economy," said Mr. Rupkey, who forecasts growth of 2.7 percent in 2003.

According to the survey, most economists expect monetary policy to remain accommodative for at least the first half of the year, followed by gradual rate increases. The key federal funds interest rate is at a four-decade low of 1.25 percent.

But tightening would be gradual, Mr. Rupkey said.
"The economy has lost about 3 million jobs in the recession, and the Fed really wants to see activity back on solid ground and people being rehired. So it will be slow to take back the rate cuts," he said.

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