Economy expected to improve gradually in 2003

WASHINGTON -- After enduring a stop-and-go recovery last year, America should enjoy stronger economic growth in 2003, many forecasters believe. But this upbeat outlook is based on an assumption that a possible war with Iraq would be over quickly without serious disruption to global oil supplies.

In preparing their forecasts for 2003, private economists ranked geopolitical risks as the biggest threat to their optimistic outlook for gradually strengthening business activity.

"The most likely scenario is that 2003 will start weakly and then get stronger," said Mark Zandi, chief economist at Economy.com. "But if the war in Iraq goes badly or if we have another terrorist attack, then we could be back in a recession pretty quickly."

The outcome of a possible war is a far bigger wild card in economists' forecasts than trying to predict whether Congress will agree to President Bush's request for an additional $600 billion in tax cuts and government spending to boost the economy over the next decade.

While the forecasters generally believe Bush is correct in pushing forward with the proposal, which he will unveil today, many are skeptical that it will provide much of a boost this year because of the time it will take to win congressional passage.

"The stimulus package will give a kick to the economy, but it won't be a huge one," said David Wyss, chief economist at Standard & Poor's in New York. "But this is a half-speed recovery so far and it would be nice to kick it up a notch."

After tipping into a recession in March 2001, ending a record 10-year long economic expansion, the economy began growing again in the final three months of 2001 and throughout 2002. But the problem is that the growth has been erratic with a strong quarter of activity followed by much weaker activity.

In terms of economic growth, analysts are looking for gradual improvement as the year progresses, helped by the prospects of Congress passing some form of Bush's stimulus package, continued low interest rates supplied by the Federal Reserve and a quick and successful conclusion to any war in Iraq.

"A quick and decisive war against Iraq would boost confidence and slash oil prices. Uncertainties, which have been holding back the stock market and business spending, would dissipate," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

Many analysts believe the gross domestic product, the country's total output of goods and services, will expand at a 2 percent rate in the current quarter but will slowly improve to around 4 percent growth by the final quarter.

That gradual improvement won't be enough to keep the unemployment rate from rising from the current eight-year high of 6 percent to possibly as high as 6.5 percent by early summer, many analysts are forecasting.

After that, however, they see the jobless rate starting to retreat with unemployment probably ending the year about where it is now at 6 percent.

The Federal Reserve, which cut already low interest rates in November by another half point, is likely to leave its key federal funds rate unchanged for some time, possibly the entire year, many analysts believe, a forecast which would be good news for borrowers, who have already taken advantage of the lowest interest rates in four decades to buy homes and autos at record rates and get additional spending money by refinancing their existing mortgages.

Businesses, who so far have been a no-show in terms of bolstering the recovery, are expected to start doing their part by increasing their spending on new plants and equipment this year -- a crucial assumption given that analysts believe consumers will start to cut back from their rapid pace.

As for inflation, analysts believe that most consumer prices will remain well-behaved although they are looking for energy prices to rise at least in the early months of the year because of worries about the impact a war would have on global supplies.

But analysts are predicting that oil prices could drop significantly if the United States does score a quick victory in Iraq and that country steps up its production.

"If the war is over quickly and Iraq can produce more oil, that could drive oil prices down to $15 per barrel," predicted Sohn, a development which would provide a significant boost to the U.S. economy through lower energy costs for consumers and businesses.

"Such an outcome would be worth billions of dollars, much bigger than any tax cut the president and Congress is likely to give us," said Sohn.