What's
Ahead for the Second Half
The consensus of U.S. economists is
for strong economic growth during the rest of 2004. Wall Street, on the other
hand, appears worried about the direction of interest rates, inflation, and the
upcoming election.
The Wall Street Journal’s ongoing
survey of more than 50 economists revealed a mostly encouraging outlook at the
2004 midpoint. Economic growth is expected to continue; higher inflation rates
due to short-term factors may soon abate; unemployment is expected to fall.1
Wall Street apparently sees things
differently. The S&P 500 was down 2% for the year as of July 23, 2004.2
Economic Growth
The surveyed economists predicted gross domestic product (GDP), the broadest
measure of economic activity, would grow at a 4.4% annual rate in the third
quarter and at a 4.2% rate in the fourth quarter. This compares with a 3.9
percent annual rate in the first quarter, meaning the consensus sees the economy
picking up speed in 2004.3
Eighty-seven percent of the economists said business spending will be the
primary source of growth during the second half of 2004. Only 11% saw consumer
spending as the primary source of growth.4
Inflation
Sixty percent of the surveyed economists said that recent increases in the
inflation rate were the “result of temporary factors that are likely to
dissipate as the year progresses.” High oil prices in particular were blamed.
They see the Consumer Price Index rising at a 2.9% annual rate by the middle of
the fourth quarter.5
The Federal Reserve raised key interest rates in June 2004 to help stave off the
threat of inflation, and has upped its inflation outlook to 1.75 to 2%, up from
its 1 to 1.25% forecast in February 2004.6
Federal Reserve Chairman Alan Greenspan told Congress that the Central Bank
plans to raise rates at a “measured” pace, but is prepared to raise them
more quickly if needed to rein in inflation.7
Employment
The consensus is that the unemployment rate will ease to 5.4% by the end of
2004, down from June’s 5.6% rate.8,9 The economists expect the
increase in business spending to translate into more jobs and higher wages,
which in turn could stimulate consumer spending. Corporate profits were up 30%
during the first quarter, compared with a year earlier. They are forecasted to
be up 18.4% for the year.10 This indicates that businesses appear to
have the means to spend more money and hire more workers.
But the S&P May Not
Agree
Contrasted with these encouraging forecasts is a study that indicates the
S&P 500 may be foretelling a slowdown in economic growth in 2005. Since
1953, in three out of every four years when the S&P 500 was down in July for
the year to date, real GDP slowed during the following year.11 Even
though the S&P 500 was up slightly this year on the first day of the second
half, it has closed in negative territory for the year several times since July
15.12
The November election also appears to be a factor weighing on the stock market.
The prospect of electing presidents historically has roiled the stock market,
and this year appears to be following precedent.13
Forecasts are useful to businesses, government agencies, and investors, but they
are meant to be a guideline only. Although 2004 appears to have a bright
outlook, any adjustments to your financial strategy should be made in light of
your personal situation and long-term goals.
1, 3–5, 9, 10) The Wall Street Journal, July 2, 2004
2, 12) Yahoo Finance, 2004, for the period 1/1/2004 to 7/23/2004. The
performance of an index is not indicative of the performance of any particular
investment. Individuals cannot invest directly in an index. Past performance is
no guarantee of future results.
6, 7, 11) The Wall Street Journal, July 20, 2004
8) Bureau of Labor Statistics, July 20, 2004
13) The Wall Street Journal, July 26, 2004
