And so it begins! President Bush has been sworn in for another four-year term in office, and soon his administration will submit its budget for 2006 with a renewed focus on keeping the U.S. economy growing at its current pace.
We talked to Jim Glassman, senior U.S. economist at JP Morgan, to ask him about how the U.S. economy has been doing and what he sees down the road in 2005.
ABC: This week the Commerce Department will release its advanced fourth quarter gross domestic product figure for 2004. What is your projected estimate for GDP for the quarter and for 2004 overall? What economic trends from the fourth quarter do you think will continue into the new year?
GLASSMAN: We forecast fourth-quarter real GDP growth of 3.5 percent annualized and that would bring growth in 2004 to 3.8 percent on a fourth-quarter-to-fourth-quarter basis.
ABC: Was there one overall factor in 2004 that led to economic growth? If so, will it continue into 2005?
GLASSMAN: Growth in 2004 benefited from earlier policy stimulus -- the Fed's low interest rates, tax cuts and federal spending -- that enabled companies to repair their financial balance sheets and finally begin to boost spending. The economy was on a track to grow even faster had oil prices not doubled. OPEC failed to anticipate the global rebound, boosted output too slowly and allowed prices to run up far above its target. Economists estimate that the surge in oil prices slowed the U.S. economy by 1 to 2 percentage points in 2004 -- implying that growth would have been far higher than near 4 percent had oil prices remained stable.
The same factors -- good profitability and strong capital spending -- that helped in 2004 will remain in 2005. At the same time, an expected retreat in oil prices will reverse some of the drag that slowed the economy in 2004. Finally, with corporate profit margins now at record levels, new income growth is likely to be more balanced, with worker compensation catching up to the pace of the overall economy and supporting consumer spending.
ABC: With the dollar at record lows against other currencies, what effect if any will this have on the economy in 2005?
GLASSMAN: The lower dollar versus the euro -- but not versus our Asian trading partners -- will have little impact on the U.S. economy. What U.S. manufacturers gain in competitiveness versus Europe, they will lose as the European economy slows under the weight of a stronger euro.
ABC: Inflation has largely been kept in check, consumer spending remains strong and housing markets are robust even with the measured increases in interest rates by the Federal Reserve. Should we expect these conditions continue into the new year?
GLASSMAN: We should expect a repeat of these factors in 2005. Headline and core inflation is likely to ease in 2005, with direct and indirect help from lower oil prices, competitive conditions related to an underemployed U.S. and global economy -- seen in the struggles of the auto and airline industry -- slower rises in medical costs, and renewed declines in household furnishing and apparel prices as the expiration of textile and apparel quotas (the Multifiber Agreement terminated on Dec. 31, 2004) allow companies to consolidate operations and production continues to shift to East Asia. Housing activity should remain strong, because any Fed tightening is being offset by an improving economy, new job and income growth and improving real estate values.
No significant releases scheduled.
December Existing Home Sales (10 a.m. ET)
[expected: 6.80 million/prior: 6.94 million]
Sales of existing homes fell during December from the record pace set in November. According to a report from the National Association of Realtors, existing homes sold at an annual rate of 6.69 million units last month. That was lower than the anticipated rate of 6.8 million.
No significant releases scheduled.
December Durable Good Orders (8:30 a.m. ET)
[expected: +0.6 percent/prior: +1.4 percent]
Are America's factories getting more orders for big-ticket items? Last month's significant jump was a shock -- analysts were expecting a moderate 0.5 percent jump. This report is potentially market moving.
Q4 Gross Domestic Product Growth (8:30 a.m. ET)
[expected: 3.5 percent/prior: 4.0 percent]
This is the first in a series of three calculations of the most comprehensive measure of U.S. economic activity from October to December 2004. Q3's final 4.0 percent growth was better than the initial estimates of 3.9 percent, but below the first quarter's 4.5 percent high-water mark.
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