For the Federal Reserve and its chairman, economic forecasting is far from a dismal science.

In testimony before Congress this week, Chairman Alan Greenspan offered a view of the economy that was perfectly Panglossian . The economy is strong, the outlook is great and inflation isn't a problem, at least not yet.

Stock investors don't seem to be buying the rosy scenario. While the market did rally in the wake of the speech, it's recently taken a turn for the worse on concerns that profit growth may be slowing down.

The Nasdaq has now broken below its May lows and the Dow and S&P 500 are closing in on their lowest levels for the year, perhaps signaling that Greenspan's assessment of the economy is wrong.

"To me, Greenspan is the personification of Dr. Pangloss from Voltaire's Candide," said Paul Kasriel, chief economist at Northern Trust. "Dr. Pangloss was this eternal optimist despite everything bad that happened to him and everyone around him."

Although Greenspan did point out some risks to his optimistic outlook, including terrorism and continued business caution, he suggested that the economy would accelerate in the second half of the year. Indeed, the central bank is predicting growth of 4.5% to 4.75% "over the four quarters of 2004."

Peter Morici, a business professor at the University of Maryland, said this forecast implies growth of about 4.8% for the remaining three quarters. The economy is expected to grow just 3.8% in the second quarter after climbing 3.9% in the first.

"If growth was only 4% in the second quarter, the economy would have to grow well in excess of 5.5% the remainder of the year," Morici said.

"Given the unsold inventory at General Motors ( GM) and Ford ( F), the news on housing starts ... and other data floating around, 4.5% to 4.75% growth seems a bit optimistic."

One reason Greenspan seems more upbeat than many private-sector economists -- who are calling for 4.1% growth this year, according to Blue-Chip Economic Indicators -- is because he believes consumer spending will bounce back strongly.

Retail sales have been soft recently, falling 1.1% in June, but Greenspan said that was largely because higher energy prices have eaten into consumer's discretionary income. Since these costs are "transitory," the weakness in spending should prove "short lived," he said.

Still, Kasriel said natural gas prices are projected to rise further and he believes oil and other commodity prices are likely to remain elevated because demand will continue to be strong.

"What we have is a global economic recovery taking place and you have the second-largest economy in the world, Japan, now growing in excess of 6% after being stagnant for 10 years," he said. "Don't you think they're using more copper, steel and crude oil now that their factories are humming again?"

While Kasriel does think spending will increase in the third quarter, he said it might not be as strong as the Fed expects.

"With interest rates starting to moderate housing activity, consumer spending is not going to be accelerating in the second half of the year," he said, adding that fiscal stimulus has also "decayed."

The period of ultra-low interest rates prompted a wave of home buying over the past few years and an unprecedented refinancing boom gave consumers plenty of extra cash to spend. But as mortgage rates creep higher, the housing market is expected to cool down. And without big tax rebates from the government, consumers will have few excuses to splurge in the second half of the year.

Of course, these issues wouldn't be as significant if the labor market were to come roaring back. But job growth has already weakened from its brisk pace in March and April, and with corporate profits expected to decelerate in the third and fourth quarters, companies could well keep a tight rein on labor costs going forward.

Lakshman Acuthan, managing director at the Economic Cycle Research Institute, said it is clear from his firm's Weekly Leading Indicators that the economy is transitioning to a more moderate pace of growth. The WLI, which is a good gauge of future economic activity, has slowed sharply since the beginning of the year. Meanwhile, the monthly index of leading indicators fell 0.2% in June and numbers for April and May were revised down. "There is an unequivocal downshift in economic activity," he said.

Nevertheless, Acuthan doesn't think there's reason to panic. The recent softness in the economy won't be "the pause that refreshes," but neither will it lead to a significant retrenchment in activity. "We're going from above-trend growth to something closer to trend," which lies at around 2.5% to 3%, he said.

Just why the Fed chose to issue such bullish projections for 2004 isn't entirely clear. Kasriel said the central bank might be trying to inspire confidence. By talking up the economy and playing down the threat of inflation, the Fed may be able to encourage consumers and businesses to spend money.

William Curt Hunter, a business professor and dean at the University of Connecticut, thinks the central bank simply has confidence in the resilience of consumer and capital spending. "The estimates may be a little high," he said. "But I don't think they're way out of line." As a former policy maker for the Federal Reserve, however, Hunter said he knows the forecasts will be revised "one way or the other."

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