Public Release: 

Professor says economy still booming, gas prices should drop considerably

University of North Carolina at Chapel Hill

All of the nation's economic forecasters have been raising their earlier predictions every month for a year, a University of North Carolina at Chapel Hill financial expert says. They will be forced to do it again this month because news about the fourth quarter of 1999 keeps getting better, and economic news continues its pleasant surprises here and, with some exceptions, abroad as well.

"All of my professional forecasting colleagues laughed at me, and many openly scoffed at my prediction that the seasonally adjusted annual rate of growth of the real gross domestic product (GDP) in the fourth quarter of 1999 would hit 7 percent," said Dr. James F. Smith. "On March 30, we learned from the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce, that the 'final' estimate of the growth rate for that quarter was 7.3 percent, the highest since the first quarter of 1984."

Smith, finance professor at UNC-CH's Kenan-Flagler Business School, described the national economic outlook in the April issue of "Business Forecast," a newsletter he writes for UNC-CH. Three times in the past five years he was the nation's most accurate economic forecaster, according to The Wall Street Journal.

"It's quite likely that gasoline prices will be much lower later this year than they are now," Smith wrote. "The Organization of Petroleum Exporting Countries (OPEC) and the major non-OPEC exporters like Mexico and Norway know that attempting to maintain oil prices at anything like $30 a barrel is self-defeating. There are huge incentives for oil consumers to develop new ways to economize and for new exploration activities to pick up dramatically."

Each year, he said, the world requires less energy to produce each individual product. Energy efficiency is constantly improving and, in about 20 years, is likely to have increased enough that oil producers will get only about $5 a barrel.

"As oil prices come down, the so-called 'headline' inflation rates around the world will decline as well," the economist said. "Core inflation in the U.S., which excludes often-volatile food and energy prices, remains at levels last seen in the early 1960s. It should not become a problem until very late this year or more likely, in early 2001."

About the only sector of the U.S. economy slowing down is the housing market, he said. Existing home sales are off their record pace of 1999, but not by much.

Lack of supply rather than a sharp decline in demand appears to be the reason for the modest downturn, Smith wrote. In February, there was only a 2.8 months level of supply, the second lowest ever recorded after the revised 2.6 months level in January.

"What has amazed analysts and forecasters is the fact that the momentum of the U.S. economy has kept right on going in 2000, even as we have all observed that Y2K concerns were nearly all misplaced," he said. "Perhaps the most dramatic example has been sales of automobiles and light trucks."

Total vehicle sales in 1999 shattered the old record set in 1986 by more than a million units, Smith wrote. Vehicle sales were 17.4 million units last year, well above the old record of 16.3 million.

"We all expected to see lower vehicle sales in 2000, but so far that has not happened," he said. "January saw a sizzling pace of 18.3 million unit sales at an annual rate, and February topped that at a nearly unbelievable 19.7 million annual rate after seasonal adjustments."

That was the second highest sales month ever for cars and light trucks.

"All of this robust demand for new vehicles is coming despite rising gasoline prices," Smith wrote. "Of course, it is still true that we pay less for a gallon of gas in the U.S. than most people around the world pay for one liter of it."

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Note: Smith can be reached at 703-799-9685 or 919-962-3176. As time allows, he's willing to discuss most economic issues with reporters. Contact: David Williamson, 919-962-8596.

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