In its year-end forecast, The Bond Market Association’s Economic Advisory Committee calls for moderate economic growth in 2003, driven by continued consumer spending, low interest rates and, most important, growth in business investment. However, committee members, who are chief economists at nearly two dozen leading investment banking firms, cautioned if business investment fails to accelerate or if there’s a shock to the economy, such as a long war with Iraq, economic growth will be threatened.
“Sustained recovery will depend on growth in business investment, which is already evident and which we think will grow, and improved corporate profitability,” said Michael Decker, research and policy director of The Bond Market Association. “Assuming consumer spending continues to grow, business investment accelerates and interest rates remain low, we are likely to see moderate growth in 2003.”
Most committee members believe the current round of interest rate cuts, which the Federal Reserve began implementing in 2001, has come to an end. Most members believe the Fed will begin to “demonstrate a bias towards raising rates” in 2003 as the economy grows. A majority of survey respondents also expect the Federal Funds rate to remain flat at 1.25 percent for the first half of 2003 before beginning to increase to nearly 2 percent by the end of the year.
The committee forecasts the economy will grow 2.7 percent in 2002 and 3.3 percent in 2003. That said, there’s widespread agreement among members that virtually all of the risk to the forecast is on the negative side. Perhaps the biggest risk is the possibility of a protracted military conflict in Iraq or additional terrorist attacks either at home or abroad. Depending on the scope of such events, the risk to economic growth could be significant.
Additionally, a sharp drop in consumer spending is a cause for concern among some members. Most members believe growth in consumer spending will slow in 2003 compared to 2001 and 2002 but, nevertheless, hold up reasonably well. Another risk cited by committee members is continued weak corporate profitability. If corporate profits remain weak, corporations will not invest and hire new workers, which would clearly be negative for the economy. This isn’t a likely scenario, however, as the committee forecasts growth in capital expenditures and a flat unemployment rate.
“Not a single committee member is forecasting a return to recession in 2003,” Decker said. “But a shock to the economy — such as a prolonged war with Iraq, a spike in producer prices, particularly energy, or more corporate scandals — would threaten the economy’s ability to grow.”
The committee expects inflation to remain modest, with consumer prices rising 2.4 percent in 2002 and 2.3 percent in 2003. On the other hand, a majority of the committee believes business investment has begun to pick up this quarter after eight straight quarterly declines. The committee is forecasting nonresidential fixed investment will grow 3.3 percent in 2003.
Survey results also project an increase in the federal budget deficit to $220 billion in FY03. Afterwards, most committee members expect the deficit to remain at roughly the same level for several years. Few members believe the government will return to a balanced budget before the end of the decade.
The Bond Market Association represents securities firms and banks that underwrite, trade and sell debt securities both domestically and internationally.
