How the 2005 economy could affect Bush's big plans

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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