Dr. Rajeev Dhawan, director of the college’s Economic Forecasting Center, said that for the 2003 real Gross Domestic Product (GDP) growth in the U.S. would only reach 2.2%, but should accelerate to 3.3% in 2004. The full benefits of recovery should become evident in 2005 when real GDP increases by 4%, he said.
Given that the upcoming few quarters are not of spectacular growth, the unemployment rate will stay in the 6.2 - 6.4% range for the next 12 months and then start declining in late 2004, Dhawan predicted. The annual average unemployment rate will be 6.1% for 2003 and will remain there in 2004, though it should drop to 5.8% in 2005.
Dhawan expects unemployment to drop and GDP to grow mainly though increased business investment – largely as a result of the $1.7 trillion in tax cuts that have occurred during President Bush’s tenure.
On an annual basis, investment declined by 5.7% in 2002 and should show only a small increase of 1.3% in 2003. However, the fiscal and monetary stimulus of tax cuts should finally brings this number into “strong positive territory” by 2004, when it is expected to grow by 7.9%. By 2005, Dhawan expects investment to grow by a healthy 10.4%.
“With inflation very low right now, depreciation rates for new technologies very high and the Federal Reserve keeping short term rates low, an investment growth-led recovery is indeed possible," he said.
However, he cautioned that negative reaction to increasing federal deficits – expected to top $480 billion next year -- and a fast jump in long term interest rates could “nip in the bud" a recovery.
