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Economy expected to rally into 2004

KANSAS CITY, MO. — KANSAS CITY, Mo. -- The U.S. economy will gain strength in the second half and keep accelerating into 2004 when it will expand by the most in four years, according to a private survey of economists released yesterday.

U.S. gross domestic product will rise at a 3.7 percent pace in the current quarter and at a 3.8 percent rate in the final three months, according to the average forecast of 54 economists surveyed Aug. 4-5 by Blue Chip Economic Indicators of Kansas City. In the last survey, economists had expected a 3.6 percent increase in third-quarter growth.

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Economists raised their third-quarter estimates because the Federal Reserve's benchmark overnight bank lending rate is at a 45-year low, corporate profits have risen five quarters for Standard & Poor's 500 companies, and the government has cut taxes.

"Expectations remain high that the U.S. economy is finally poised to post sustainable real GDP growth," the Blue Chip report said. "A flurry of recent statistical reports and private-sector surveys has reinforced earlier signs that the expansion began to strengthen as the second quarter came to an end."

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The economy will expand 3.7 percent next year after a 2.3 percent gain this year, according to the Blue Chip forecast. Gross domestic product grew at a 1.9 percent annual rate in the first half of this year, as industrial production and consumer confidence dropped during the Iraq war.

The report also said the United States will continue to outperform Europe and Japan. The euro-area economy, the world's second-biggest after the United States, will expand 1.9 percent next year after growing 0.6 percent this year, the forecasters said. Japan, the world's third-largest economy, will expand 0.9 percent this year and 1.1 percent in 2004, they said.

China will lead the world's major economies with growth of 7.5 percent in 2004 after a gain of 7.4 percent this year, the panel estimated. Growth elsewhere in Asia will surge. The Singapore economy will expand 4.8 percent after this year's 1.4 percent gain. South Korea's GDP will grow 5.2 percent after a 3.4 percent gain in 2003.

More than half the forecasters said the Fed will leave interest rates unchanged until at least June. Ninety-seven percent said policy-makers are done cutting rates.

Economic "recovery signs suggest that the Fed is unlikely to ease monetary policy again," Richard Berner and David Greenlaw, economists with Morgan Stanley in New York, said in the report. "But with inflation still at the low end of a 1 percent to 2 percent range, and deflation risks not completely behind us, tightening is unlikely any time soon."

That's in part because the U.S. recovery will be slow to drive down the unemployment rate, which will average 5.9 percent next year after averaging 6.1 percent this year, according to the survey.

The U.S. economy has lost jobs every month this year except January. The unemployment rate fell to 6.2 percent in July from a nine-year high of 6.4 percent in June. The economy has lost 44,000 jobs.

With slow improvement in the job market, the inflation rate will remain low and fall, the Blue Chip panel said.


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