U.S., world economies poised for boom

The U.S. and major world economies are on the threshold of a genuine economic boom and will likely record their best years since 1984, according to The Conference Board’s latest economic forecast released Monday.

The Conference Board said U.S. growth will reach 5.9 percent this year, while global growth will hit about 5 percent. Most parts of the world are growing at 6 percent or better, although Europe and Japan are lagging in the 3 percent range. This number still reflects healthy growth for both of these regions.

“Rapid top-line growth and bottom-line productivity benefits mean that near-term profit growth will be huge,” said Conference Board Executive Vice President and Chief Economist Gail D. Fosler in the latest issue of StraightTalk, her monthly newsletter prepared for Conference Board member companies. “The U.S. economy and world economies continue in the virtuous phase of a strong economic cycle in which accelerating growth generates productivity and profits and rising employment creates a new phase of income-driven consumer spending.”

Given the acceleration in corporate profits and the decline in the unemployment rate – headed back to 5 percent or lower – business investment (especially in manufacturing and technology) could actually exceed the gains of the early 1990s.

The latest Conference Board forecast projects inflation at 2.2 percent this year, nudging up to 3.2 percent next year. It expects real consumer spending to climb 5.3 percent this year and 4.5 percent next year.

Fosler said the real danger is that these “good times” disguise an underlying deterioration in cost competitiveness, especially as falling unemployment pushes wages up, high and rising commodity prices add to other non-labor costs, and fixed cost structures begin to rise. Also, prices, costs and interest rates are likely to rise suddenly, possibly without warning, creating future instability in the U.S. and in the rest of the world.

The expansion signal from The Conference Board’s leading economic index is growing stronger. Unlike the 2001-2002 period, where much of the rise in the index was driven by its financial components, virtually all of the 10 components in the index are now rising.

The strength in the U.S. is reflected in The Conference Board’s leading indexes for other countries as well. In contrast to the early 1990s, when the rest of the world lagged the recovery in the U.S., and Europe weathered a full-fledged recession, all global regions are expanding at the same time. Although there are some differences in volatility, the leading economic indexes for Europe are catching up to the strength in the Asia index.

“It is easy to underestimate the growth prospects for the U.S. and the world economy in 2004,” said Fosler. “The economic consensus has upgraded the U.S. outlook to ‘moderate growth,’ with varying degrees of optimism reserved for different global regions. These judgments are too modest.”