How the 2005 economy could affect Bush's big plans

Social Security and tax code changes could strain the federal budget. The president could use a rising GDP.

President Bush will spend a significant portion of 2005 selling Americans on a full plate of ambitious economic policy goals.

The economic climate in which the sales job takes place will be crucial. And there the Bush administration appears to be fortunate. The marketing of the president's economy policy push will take place against the backdrop of what forecasters expect will be relatively good economic news in 2005.

"The performance of the US economy in 2005 will be good but not great - at least in comparison with 2004," Nariman Behravesh, chief economist of the consulting firm Global Insight, wrote in a recent report to clients.

The White House has provided only broad conceptual outlines for initiatives it says will include overhauling Social Security by permitting private accounts, cutting the budget deficit in half over five years, and revamping the tax code. The details are sure to be both complex and controversial when they are revealed in the New Year since all involve picking relative winners and losers.

The president's plans are "going to be a tough sell" argues Mark Zandi, chief economist for Economy.Com. But "policymakers will have a propitious economic backdrop in 2005," he notes in a recent report on the firm's website.

Despite the prospects of a good economy, there is some question whether the administration will actually push for tax code reform in 2005. The Washington Post reported Tuesday that major tax changes will be pushed back to 2006 to allow the Bush economic team to cope with Social Security and budget issues in 2005. White House spokesman Trent Duffy responded "The President is committed to reforming our tax code."

Whatever the precise mix of administration initiatives, the economic setting is relatively upbeat. In Business Week's annual year-end survey of 60 top economists, the consensus forecast is that the US economy will grow 3.5 percent from the end of 2004 to the end of 2005 - just below the 3.8 percent growth rate projected for the current year.

If the business economists are correct, economic growth will be strong enough in 2005 so that corporate profits next year will rise 6.7 percent, but this after double-digit gains in the past two years. That kind of growth, however, is expected to keep businesses investing and creating jobs in 2005. The jobless rate, which was 5.4 percent in November, is projected to fall to 5.1 percent by the end of next year.

"The economy is in very solid shape," Gregory Mankiw, chairman of the Council of Economic Advisers, told reporters on a conference call last week. He was announcing the Bush administration's economic forecast for 2005, which is in line with what private forecasters expect. For purposes of building its new budget, the Bush team is projecting economic growth of 3.5 percent, unemployment dipping to 5.3 percent, and consumer prices rising 2.0 percent.

Private forecasters say the economic indicators of greatest interest to consumers will be good next year - but not strong enough so that voters will be breaking out party hats.

Most forecasters think inflation will remain a low-level threat. The consensus forecast in the Business Week survey is that consumer prices will rise 2.2 percent during 2005. There has been some pick up in inflationary pressures because of rising commodity prices, a gradual tightening of the job market, and the weak US dollar which pushes up prices for imported goods.

"The big-picture view of inflation is that the momentum of price changes has rebounded strongly," writes Ken Mayland, president of Clear View Economics. "With a continuing economic expansion, rising wage growth, and a weak dollar, we are not at the end of this thrill ride."

One factor helping moderate inflation is the expectation that oil prices will be better behaved than during much of 2004. Slowing momentum in the Chinese economy is one reason. The consensus forecast is for crude oil to end 2005 at $39.42 a barrel. Earlier this week, light crude oil was selling for $40.74 a barrel. It hit a record of nearly $56 a barrel in late October 2004. "Oil price inflation is going to come down, and has already come down," Council of Economic Advisers Chairman Mankiw says.

Nevertheless, most experts expect the Federal Reserve to continue raising interest rates to keep inflation under control. The forecasters surveyed by Business Week think the yield on 10-year Treasury bonds will increase from 4.3 percent this week to 5.1 percent.

"Homeowners who have been using their homes as a cash machine are expected to soon find it more costly to borrow," through refinancing or home equity loans, Mr. Zandi writes.

Economic forecasting is an art, not a science. So a variety of known and unknown factors could affect the economic outlook for 2005 - and with it, President Bush's odds of selling his economic proposals.

One regularly cited risk is a crash in the value of the US dollar caused by foreign central banks selling a significant part of their vast holding of greenbacks. Sharply higher US interest rates would be needed to make Treasury securities more appealing. These higher rates would hurt the housing market, the stock market, and consumers with variable rate loans.

Another major terrorist attack on the US could also disrupt the economy, but not necessarily send it spiraling. "Growth momentum for the coming year is strong enough that the economy could probably withstand another big shock - a crash in the dollar, higher oil prices, or another terrorist attack - without heading back into recession," Nariman Behravesh of Global Insight says. "It would probably take a convergence of two or more dramatic events."

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