The Wharton School spoke to four of their professors about the economic outlook for '05:

Investors, consumers and businesses have had a fair share of concerns in 2004: high fuel prices, less-than-stellar job growth and volatile swings in the stock market, which remains well below the highs set four years ago. But by many measures the year is ending well. Oil prices dropped in December, hiring has picked up, and the Standard & Poor's 500, thanks to a string of gains in the fall, returned nearly 8% from the start of the year through mid-December.

Will the good news continue in 2005? The smart money says the coming year will probably bring decent, but not terrific, gains in economic growth and stock prices, according to four Wharton professors. But they do see hazards in the deepening federal and current-accounts deficits and the falling dollar.

"I think it looks reasonably good," said Wharton finance professor Jeremy Siegel, referring to the economy and stock markets. "I think we can have 3½% to 4% real growth [in gross domestic product], with very moderate inflation - 2 ½%."

Corporate leaders recently polled by the Business Roundtable survey have similar expectations, forecasting 3.5% GDP growth in 2005. Similarly, Anthony M. Santomero, a Wharton professor on leave to serve as president of the Federal Reserve Bank of Philadelphia, has forecast 3.5% to 4% GDP growth in 2005, compared to the 3.75% he expects for 2004.

Wharton finance and economics professor Richard Marston says he, too, expects GDP to grow 3.5% to 4% in 2005. "That's a healthy economy in its middle stage of expansion." Corporate profits, he added, are not likely to grow as fast on a percentage basis as they have this year, because 2004's strong profits provide a higher base for comparison. In 2004, it was comparatively easy for businesses to show big gains over the weak earnings of 2003.

Siegel predicts the stock market will produce average gains next year. "I can see returns in the normal range of 6 to 10%." Bond prices could well fall, he cautioned, if the Federal Reserve continues to raise interest rates, as expected. "I think the Fed will continue to raise rates and probably will get to something like 3½% by the end of [2005]." On December 14, the Fed ordered its fifth hike of the year, lifting short-term rates to 2.25%, up from 1% last summer.

Siegel expects the yield on the 10-year Treasury note to rise to 5%, from the current 4.14%, by the end of 2005. That will push mortgage rates up ½ to 1 percentage point. Marston agreed, arguing that a Fed Funds rate of 2.25% is not high enough to head off rising inflation, now at about 2% (or 3.2% with food and energy costs included). The Fed rate needs to be above 3%, he said, adding that he remains "positive. I think the economy's under control. It's not expanding at a pace where [Fed chairman Alan] Greenspan is getting worried. I think the economy is healthy and people are starting to get jobs."

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