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		University of Chicago Economist Sees Warning Signs Thursday January 29, 11:53 pm ET By ETFzone Staff Economist Robert Aliber hopes this year he can better account for the huge federal deficits he says were largely responsible for his poor 2003 forecast. Aliber, a professor of economics at the University of Chicago, is a regular participant in the school's closely-watched annual forecasting conference. This year he is casting a sharp eye on macroeconomic factors such as monetary supply and federal spending, which he says are driving economic activity. "The initial conditions for an economy - the recent rates of growth of GDP or its momentum - have a powerful impact on its development," he said. "The additional complication every four years is that political managers try to manipulate economic variables so the voters are in a good mood at the time of the next election." In Aliber's view, political manipulations dominate the economic landscape. "If I had gotten the estimate of the fiscal deficit correct, then I would have been nearly correct on the GDP forecast," he said. As it was, "the actual fiscal deficit for the fiscal year was $460 billion. My error in forecasting the fiscal deficit was $214 billion. A conservative assumption is that each increase in the fiscal deficit of $10 billion leads to an increase in the GDP of one tenth of one percent." His predictions for 2003 and 2004 are as follows: Item 2003 Forecast 2003 Actual 2004 Forecast Nominal GDP (% change) 1.9% 4.6% 4.0% General Price Level (IPD Level) 1.1% 1.7% 1.5% Real GDP (% change) 0.8% 2.9% 2.5% Real Consumer Spending (% change) 0.3% 3.1% 2.4% Real Business Investment (% change) 1.5% 2.9% 2.6% Real Government Spending 3.0% 3.2% 4.0% Trade Balance (absolute value) -$490 Billion -$592 Billion -$592.2 Billion Unemployment (year's average level) 6.8% 6.0% 6.2% Real Corporate Profits after Taxes (% change) 1.6% 10.1% 6.0% Government Surplus or Deficit (absolute value) -$246 Billion -$430 Billion -$517 Billion Still, he admits to befuddlement as to why the US is doing so well, given what he terms excessive amounts of money being printed and reckless federal spending. "The 1990s bubble is larger than the 1920s bubble in terms of the percentage increases in stock prices and in the increase in the ratio of household wealth to GDP. The intuition - at least my intuition - is the larger the bubble, the larger the deflationary impact associated with its implosion. The implosion of the 1990s asset price bubble has tested this intuition. US banks have not failed. The sharp cyclical economic downturn that I had been expecting in 2001 and then again in 2002 and then in 2003 has not appeared although there was a tepid recession in 2001. It is as if one of the laws of financial gravity has been forestalled." Not surprisingly, he warns of a likely slowdown in GDP growth or even a recession once government deficit spending stops and the Federal Reserve tightens credit. Both must happen at some point, but Aliber agrees with the majority view that they are not likely to happen until after November's election. Stockholders are clearly in danger. "More than 3000 firms are listed on the NASDAQ. Our data set includes the 489 largest firms; their combined market value was $2,200 billion and their forward earnings are about $50 billion for a price earnings ratio of 45. Five firms - Microsoft, Intel, Cisco, Dell and AmGen - account for nearly 50% of the earnings and one-third of the market cap. The price-earnings ratio for the remaining firms is 56. Many of the firms listed on NASDAQ (AMEX: QQQ - News ) have grand prospects - if we only knew which ones. Still there is no way that the earnings of NASDAQ firms as a group can increase so that the rates of return to the owners of stocks of this group will be higher than the rates of return from buying a US Treasury price level indexed bond. At some stage the air in the NASDAQ bubble will leak out. The likelihood that the prices of stocks traded on the New York Exchange (AMEX: SPY - News ) will not be affected is low."   Back to Original Article: Mortgage News You Can Use   Continue with: Economic Expansion Slows G7 positions on dollar ahead of Florida meeting U.S. Economy Grew at Slower-Than-Forecast 4 Percent Rate in Fourth Quarter Economy Grows at 4% Rate in Final Quarter of 2003 Economic Growth Report Pulls Down Dow 32 Treasuries Slip on Strong Chicago PMI Dollar Falls on Lower-Than-Expected GDP Fed, economists see improvement Hire expectations Dollar Firms, Buoyed by Economic Data Part One Dollar Firms, Buoyed by Economic Data Part Two Treasuries Up as Growth Falls Short Treasuries Up as Growth Falls Short part two
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