Tue Jul 6
By MARTIN CRUTSINGER
AP Economics Writer

WASHINGTON - The economy appears headed for a banner year despite a springtime spike in energy prices and a recent increase in interest rates.
In fact, many analysts are forecasting that the overall economy, as measured by the gross domestic product, will grow by 4.6 percent or better this year, the fastest in two decades.

There were strong 4.5 percent growth rates in 1997 and 1999, when Bill Clinton (news - web sites) was president and the country was in the midst of a record 10-year expansion.

But if this year's growth ends up a bit faster than that, it will be the best since the economy roared ahead at a 7.2 percent rate in 1984, a year when another Republican president — Ronald Reagan (news - web sites) — was running for re-election.

"We are moving into a sweet spot for the economy with interest rates not too high, jobs coming back and business investment providing strength," said Diane Swonk, chief economist at Bank One in Chicago, who is predicting GDP (news - web sites) growth of 4.8 percent this year.

President Bush (news - web sites) is highlighting the improving economy at every opportunity while Democratic challenger John Kerry (news - web sites) has focused on what he calls a middle class squeeze of rising health and tuition costs and laid-off workers forced to take lower-paying jobs.

Who will win on the all-important pocketbook issues? Economists aren't sure.

"It is unclear whether voters will remember the past year and the better jobs created during that period or the past four years," said Mark Zandi, chief economist at Economy.com. "It will be a close call and that is one of the reasons the election could be so close."

Assessing the economy at midyear, most private economists are sticking with the optimistic forecasts they had six months ago, even though inflation, driven by surging energy prices, rose higher than expected and the Federal Reserve (news - web sites) started raising interest rates last month.

"We are looking for a darn good year despite the fact that we had a big jump in oil prices and interest rates are going up faster than people thought would occur," said David Wyss, chief economist at Standard & Poor's in New York.

Offsetting those drags on the economy has been stronger growth in Japan and China, which helps U.S. exports, better-than-expected consumer spending and much better job growth than analysts were expecting as the year began.

The economy has now created 1.5 million new jobs since last August, compared with a loss of 2.7 million jobs in the previous 29 months, when the country was struggling with a string of blows from a collapsing stock market to a recession and terrorist attacks.

Even with the 10 months of consecutive job gains, Bush is still facing a 1.2 million jobs deficit, from the last peak for employment in March 2001.

However, many analysts anticipate the economy will generate around 200,000 jobs per month over the next six months, a pace that would be enough to erase his deficit figure by the end of the year. That would enable him to escape being the only president since Herbert Hoover in the Great Depression to have lost jobs while in office.

Although the economy created only 112,000 jobs in June, after averaging 304,000 jobs for the previous three months, analysts expect strong job growth the rest of this year.

They predict the unemployment rate — stuck at 5.6 percent for most of this year — will improve gradually, to 5.3 percent by December, as a strengthening job market draws people back into the labor force.

Analysts also are optimistic about inflation in the months ahead, noting that oil prices recently retreated from peaks above $42 per barrel in June, and regular gasoline have declined from highs over $2 a gallon in late May. If the trend continues, inflation pressures will be eased.

The Bond Market Association's economic advisory committee, made up of economists from large financial institutions, is predicting that consumer prices will rise 3.1 percent for all of this year, a significant moderation from the 5.1 percent rate of increase through May.

The group projects overall GDP growth will be at a 20-year high of 4.7 percent, based in part on a belief that the Fed will keep to its pledge of moderation in future rate hikes because of the absence of inflation pressures.

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