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2005 Outlook: The Year Ahead

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In the always tricky game of economic "crystal-ball gazing," businesses and consumers appear to be facing a generally mixed economic outlook this year, with most forecasters projecting slower growth amid higher interest rates and moderate inflation.

Most forecasters agree that U.S. economic growth is expected to slow to between 3.5 percent and 4.1 percent, off from expected 2004 GDP growth of 4.4 percent. The projected slowdown is linked to several factors including more moderate consumer spending, which accounted for nearly two-thirds of all economic activity in the past three years.

Also contributing to this uncertain forecast is the expected rise in interest rates and an end to consumer-friendly tax cuts as the Federal Reserve Board and the Treasury are squeezed by a depreciating dollar and a budget deficit representing 5 percent of total gross domestic product.

Internationally, economic growth is elusive for both Europe and Japan. Europe is expected to show a dismal increase of just 1.8 percent in 2004 GDP, as well as post similar growth this year. After posting 3.9 percent growth early last year, Japan has seen economic activity slow dramatically and now is expecting to post growth of just 1.9 percent in 2005.

For companies, domestic demand for consumer goods is expected to slow due to rising interest rates, tax-cut phaseouts, and shaky consumer confidence over job safety. Interest rate increases also are expected to have a negative impact on the construction industry, in which Hispanic-owned companies have a growing participation. And as interest rates continue to increase, the challenging financing landscape for Hispanic-owned enterprises will become even more formidable.

However, other industries may fare better. Export-oriented companies could gain a competitive edge as the dollar's depreciation makes manufacturers, agricultural and food producers, service providers, and others more competitive in international markets. And industries that had faced strong competition from imports such as the U.S. automobile industry could see demand increase for their domestic products as the dollar's depreciation makes competing imported vehicles more expensive in the U.S. market.

The weakening of the dollar also has resulted in an increase in foreign direct investment in U.S. companies, as European buyers get more for their euro. This explains the recent surge in investment by Spanish companies in U.S. media and financial businesses tapping into the U.S. Hispanic market.

Still, key uncertainties remain that could shake the relatively fragile favorable forecasts, including how energy and oil prices develop amid the Iraq war, whether business investment continues in the wake of fewer tax incentives, and whether the pace of corporate hiring picks up once current productivity gains are exhausted. As of last November, the unemployment rate for Hispanics was 6.7 percent, according to the U.S. Labor Department 1.3 percentage points higher than the total U.S. unemployment rate of 5.4 percent. Looking to the year ahead, forecasters generally seem to predict those rates will hold barring any shocks to the economy.

The Year Ahead for Major Sectors

Automotive Lower gas prices and increased tourism could make 2005 a strong year for auto retailers.

Manufacturing This sector could be headed for a recovery, with electronics, defense, transportation, and health care industries gaining the most from an increased demand for products.

Retail In a year of modest growth, the greatest advantage goes to retailers that "supersize or specialize." E-commerce will continue to be important as consumers shop online with greater frequency.

Construction Although slower than 2004, steady growth is expected for 2005, fueled in part by nonresidential building and the demand for multifamily complexes.

Finance Mortgage lending and refinancing are expected to slow, but Hispanic-owned businesses may see more attention from financial institutions focusing on small and mid-size companies.

Service Global outsourcing means fewer jobs and greater responsibilities for service providers, but "insourcing" could create new opportunities.

Transportation Higher shipping rates are in the forecast as demand for freight exceeds capacity, giving trucking companies a powerful advantage.

Wholesale In this changing market, distributors are trying new ways to stay relevant as technology encourages lower-cost competition.

U.S. ECONOMIC FORECASTS
For a comprehensive overview of this year's projected economic outlook, Hispanic Business reviewed the forecasts of three respected sources: the Federal Reserve Bank's Survey of Professional Forecasters, the Congressional Budget Office, and The Economist.
Congressional Budget Office "Survey of Professional Forecasters" The
Economist
2004 2005 2004 2005 2004 2005
Real GDP growth 4.5% 4.1% 4.4% 3.5% 4.4% 3.5%
Inflation 2.6% 2% 3.2% 2.2% 2.7% 2.3%
Unemployment rate 5.6% 5.2% 5.5% 5.3% 5.4% 5.9%
Interest rates
3-month Treasury bill 1.3% 2.6% 1.3% 2.7%
10-year Treasury note 4.6% 5.4% 4.3% 4.8%
Budget deficit
(as % of GDP)
-5.0% -4.2% -5.5% -5.6%

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