Economy Sobers Up, but Hangover Lingers

Economists are predicting great things for 2004. But beneath the rosy forecasts lie some disturbing trends.

Experts are calling for the economy to grow 4.2% next year, thanks to a rise in business investment and a further increase in consumer spending, according to a survey by Blue Chip Economic Indicators, an economic forecasting group. If so, it will be the fastest pace in five years, and well ahead of the 2.9% forecast for 2003, despite an 8.2% surge in gross domestic product during the third quarter.

"I think the U.S. economy is very resilient," said Anirvan Banerji, director of research at the Economic Cycle Research Institute. "Even an unexpected shock is unlikely to derail this recovery."

Optimism aside, Banerji believes the recovery will be "lopsided," with some sectors performing well and others continuing to struggle. "The structural shift in the economy is ongoing," he said. "There is continued deflation in finished goods and a continued need to outsource jobs to Eastern Europe and India."

The manufacturing sector has been hit hard by deflationary pressures in manufactured goods, and some 2.5 million jobs have been lost since January 2001. Banerji said more factory workers will be laid off in 2004, even as the economy improves. While jobs will be created elsewhere, he said employment growth "is unlikely to be commensurate with the kind of robust GDP growth we've seen."

Since the beginning of the last recession in March 2001, almost 2.4 million jobs have been lost, making this the worst job crisis since the Great Depression, and despite signs of improvement recently, the labor market is far weaker today than it was at this point in previous recoveries.

This is particularly worrying for consumers, who already are heavily indebted and worried about job security. Mortgage balances have surged this year and household debt-to-net-worth ratios are currently sitting close to all-time highs. Many economists say they expect spending to slow going forward because consumers are so highly leveraged and there's little, if any, pent-up demand.