Mirror Mirror, Whither 2004?

The Wharton School peers into its collective crystal ball and checks a few chicken guts to get a bead on the status of the economy for 2004. Remember, they only THINK they know more than you do:

After a slow and confusing economic recovery, 2004 will be a year of solid improvement building on positive news, including the capture of Saddam Hussein, at the close of 2003.

New technology and changing public policy, as the United States faces another presidential election, will also shape the business world in the coming year, predict Wharton faculty, who were interviewed by Knowledge@Wharton on five key sectors: the economy, the banking industry, airlines, telecommunications and health care.

Wharton finance professor Jeremy Siegel suggests that GDP will rise 3-4% after adjusting for inflation, and unemployment will decline as new job growth begins to take off. “I’m optimistic,” he says. “I think it’s going to be a good year.” Stocks will continue to do well, particularly in the first half of the year, before rising interest rates could put a damper on share prices. Rates on 10-year treasuries could rise to 5% by the end of 2004, up from the current 4.25%, he notes.

The Dow Jones Industrial Average will trade in a range of 9,000 to 12,000 during the year and is likely to close between 10,500 and 11,000, Siegel predicts.

….Can Airlines Reinvent Themselves?

An improved economy will boost the fortunes of the airline industry, which has been in a slump driven by the economic slowdown and the terror attacks of Sept. 11, 2001, according to W. Bruce Allen, professor of business and public policy at Wharton.

Consumers with increasing discretionary income typically choose to travel farther, and faster, leading them to book airline seats rather than plan a driving vacation, he notes. “I’m optimistic that in terms of traffic the market will come back. We have become a footloose kind of economy that is more leisure-based; one of the things consumers like to do with their leisure is go to Disney World and New Orleans.”

The business traveler will also return to the skies, predicts Allen. “Some of these guys may have been lost because they discovered teleconferences, but I still think people want to see the whites of the eyes of the people they’re dealing with.”

….VoIP and Voice over WiFi

In telecommunications, Voice over Internet Protocol (VoIP), which allows consumers to make telephone calls over the Internet, will grow in importance early in the new year, predicts Gerald Faulhaber, Wharton professor of business and public policy.

AT&T, the nation’s largest U.S. long-distance provider, recently announced it will begin selling telephone service using VoIP and expects to be operating in 100 markets by the end of the first quarter of 2004. Time Warner Cable, the second-largest cable company in America, has been testing VoIP technology in Portland, Maine, since last May and now intends to roll out service to its customers across the country. Comcast, Cablevision Systems and Cox Communications also are offering VoIP service on a limited basis.

The industry is gearing up for a debate on how the technology will be regulated, say Faulhaber. The FCC has formed a working group on VoIP and has held hearings on whether VoIP should be subject to the same kinds of regulations that apply to telephone service now. “It’s going to be an interesting battle,” he notes.

In October, the U.S. District Court in Minnesota ruled that the Minnesota Public Utilities Commission can not apply state telecommunication regulations to Vonage, a VoIP provider. The Court wrote: “State regulation would effectively decimate Congress’s mandate that the Internet remain unfettered by regulation.”

….The High Costs of Health Care

Healthcare has been dominated in the past year by the debate over legislation that extends drug coverage to Medicare recipients for the first time since the government-funded health system for the elderly and disabled was created 40 years ago.

After all the discussion, there will be very little effect of the legislation in 2004, suggests Mark Pauly, Wharton professor of healthcare systems. The only impact of the bill in 2004 may be enhanced payments to Medicare managed care providers and a discount card that will give recipients reduced prices on out-of-pocket drug costs.

The drug benefit will not kick in until 2006 and provisions aimed at making Medicare more competitive will not go into effect until 2010, Pauly notes. The new Medicare drug benefit will not have much impact on drug company sales, profits or share prices, he says, adding that drug firms may lose business if enough employer-financed plans reduce or eliminate drug benefits now that Medicare has stepped in. “I don’t see this as a give-away to the pharmaceutical firms and if enough employers drop coverage, it can be a take-back.”

Sounds pretty good – I feel optimistic as well just based upon anecdotal evidence of friends finally finding jobs after being laid off, increased spending, and just plain more money floating around. We are due for a good year, don’t you think?

And for naysayers about he importance of capturing Saddam – these guys are cold hard economics fiends who don’t give a damn about anything else. If they say the capture is important enough to spur the economy, it must be important.