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<br /> 1 The U.S. Economy
<br /> Solid growth, higher profits lie ahead, as business picks up speed
<br /> usiness activity will post its best growth in four rates until it's
<br /> Byears in 2004. We expect gross domestic prod- 0 sure the econo-
<br /> L uct(GDP) to gain as much as 4.5%, compared my is growing
<br /> with about 3% in 2003. steadily. When
<br /> dThough welcome, the pace will be slower than the Fed moves—
<br /> usual at this stage of an economic recovery. The rea- perhaps as early
<br /> son: Car and home sales stayed strong during the , as the middle of
<br /> slowdown, leaving them little room to grow. Here's a 2004—it's likely•
<br /> look at prospects for key indicators and sectors. i. to make a num-
<br /> ber of hikes that
<br /> •
<br />' MODEST INFLATION is expected next year with the _ will put the
<br /> Consumer Price Index(CPI)rising about 2%, down a - .art » --- prime at 5% by
<br /> little from 2003. There will be exceptions.The costs of the end of 2004,
<br /> health care, energy,education,household repairs and about a percent-
<br /> accounting services figure to rise faster than the overall age point higher
<br /> CPI. In other sectors of the economy,excess capacity than now.
<br /> at home and competition from abroad will make it Long-term
<br /> hard to raise prices. Even companies facing increases rates will move
<br /> in raw materials prices and medical insurance will be up, too, pro-
<br /> hard-pressed to pass them along to customers.They'll pelled in part by
<br />. have to rely on im- worry about a
<br /> EARNINGS GAINS STILL TO COME
<br /> proved productivity- mounting federal budget deficit. The yield on 10-year
<br /> us s Soo Treasury bonds will be about 5.5% by year-end 2004,
<br /> Operating r Share compared with 4.5% at year-end 2003.Mortgages wi
<br /> HIGHER CORPORATE ,,� p Y
<br /> PROFITS are likely in i14 %•j:i be more expensive,but still affordable, with the 30-
<br /> 2004, rising 13%, ,iii year fixed rate in the 6.50% to 6.75% range.
<br /> ii
<br /> about the same as so o e,,,
<br /> in 2003. Greater ,,,,,, VOLATILE ENERGY PRICES will persist,although relief is
<br /> productivity gets $6 n/of",,,,,
<br /> t„ on the horizon. Crude oil should average about$28 a
<br /> most of the credit 2000 2001 2002 2003 2004 barrel early in the new year, then slip to the$22-$25
<br /> Sources:Standard&Poor,,Klptger
<br /> because it generates range as production increases in Iraq.
<br /> higher output without pushing up prices. In fact, But there are wild cards: Civil unrest in oil-pro-
<br /> price hikes will be hard to sustain until 2005. ducing countries such as Venezuela and Nigeria,or a
<br /> major pipeline break in Russia, could cause prices to
<br /> ANOTHER GOOD YEAR IN STOCKS, with major indexes spike by$5 or$10 a barrel. Demand for oil is growing
<br /> rising about 10%, roughly in line with corporate earn- thanks to strengthening economies around the globe.
<br /> ings. Bonds will take a modest hit when interest rates Gasoline prices at the pump can be expected to
<br /> start to rise- soften, ranging from$1.30 to $1.60 a gallon during
<br /> 2004,with the high mark coming in the peak summe
<br /> LOWER UNEMPLOYMENT is coming, but the dip will be driving season, as usual. But even a brief production
<br /> small—from about 6.4% in 2003 to just under 6% in glitch could push the price to $1.75 a gallon.
<br /> 2004. Job growth will stay relatively slow but should Natural gas will remain costly: Production can't
<br /> exceed 150,000 jobs a month by midyear, enough to keep up with demand. The price per million British
<br /> trim the jobless rate. Pay won't rise much. thermal units (MMBtu), now about$5,will average
<br /> $5-$7 this winter, soaring to $10 per MMBtu in cold
<br /> HIGHER INTEREST RATES are a sure thing,but not right snaps. By summer,the price is likely to slip to about
<br /> away. The Federal Reserve won't boost short-term $5 per MMBtu, climbing to$6-$8 in December.
<br /> 2 I The Kiplinger Letter • KiplingerForecasts.com
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