CHAPEL HILL - When the U.S. Department of Commerce's Bureau of Economic Analysis announced April 30 that preliminary estimates of real gross domestic product growth climbed at an annual rate of 4.5 percent, observers immediately realized that all previous forecasts of U.S. economic growth in 1999 were too low, a University of North Carolina at Chapel Hill financial expert says.
"The only question is by how much," said Dr. James Smith, professor of finance at UNC-CH's Kenan-Flagler Business School and chief economist for the National Association of Realtors.
"Even if there were no more growth in all of 1999, a patently absurd forecast, real GDP growth would still be 2.8 percent," Smith said.
GDP is the total value of all goods and services produced for final use within the United States, he said. Gross domestic purchases, an alternative measure of economic activity, grew at an annual rate of 6.8 percent in the first quarter, up from 5.4 percent in the preceding quarter.
The financial analyst, credited in January by The Wall Street Journal as being the nation's most accurate economic forecaster twice in three years, makes his remarks in the June issue of "Business Forecast," a bimonthly newsletter he writes for UNC-CH.
"...The overall economic outlook remains quite extraordinarily good," Smith said. "Consumers are confident, as well they should be with rising employment and incomes and rather low inflation."
For the near future, U.S. labor productivity likely will keep growing in excess of 2.0 percent, he said. Chiefly, that's because Americans are learning to use computers more intelligently to make work more efficient.
"Manufacturing jobs keep disappearing, in large part due to global competition and large productivity gains, but high-paying jobs in the service sector keep being created at a rapid pace," Smith said. "Some observers worry about a shortage of workers, but either a major relaxation of our overly strict immigration laws or a big budget cut for the border patrol would solve that problem."
In the past quarter consumer purchases increased at an annual rate of 6.7 percent, the fastest in 10 years, the economist said. Consumer confidence as measured at the University of Michigan has been over 100 for 25 of the past 26 months matching the record set in 1964-1966.
Owner-occupied housing increased in value $1.2 trillions from 1996 to 1998, the Federal Reserve Board estimates. Global stock markets hit a new record of $25 trillion in April, up $7 trillion since October last year. The U.S. stock market is worth about $13.8 trillion or about 55 percent of the world's total capitalization.
"Studies conducted over more than 50 years have shown that consumers tend to spend about 3 to 4 percent of increases in stock market wealth that have persisted for a year or more," Smith said. "In each of the past three years, the U.S. stock market has increased by about $1.5 trillion. Thus, the wealth affect from stocks should be adding $45 billion to $60 billion a year to increased consumption.
"Combined with spending from capital gains on housing, this is adding about $200 billion a year to the purchasing power of consumers. It should come as no surprise to see so many retail companies setting new records."
In Asia, the worst of the economic crisis seems to be past, he said, and that area is poised for continuing growth. The Brazilian recession appears to be much milder than feared, and such countries as Argentina and Mexico are growing faster than predicted. Europe remains sluggish, at least in the largest economies, except France, but some signs of growth are evident. Russia's default crisis seems well-contained and will not produce the predicted dire impact on other nations.
"It still looks likely that real GDP growth will be around 4.0 percent this year, 2.5 percent in 2000, 1.6 percent in 2001 and a small decline of 0.3 percent in 2002," Smith said. "The recovery in 2003 should lead to another decade of solid growth averaging about 3.1 percent a year before we have another recession in 2013.
"Most other countries in the world would love to have an economy as healthy as ours," he said. "We ought to do all we can to encourage them."
Note: Smith can be reached at 202-383-1184 or 919-962-3176 or at home at 968-8433. As time allows, he's willing to discuss most economic issues. E-mail: jsmith@realtors.org Fax: 202-383-7568.