Wharton Faculty Predict Improved Business Outlook for 2004

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 faculty of the Wharton School of the University of Pennsylvania.



Wharton finance professor Jeremy Siegel suggests that GDP will rise 3-4% adjusted for inflation, and unemployment will decline as new job growth begins to take off. 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, he predicts.



Richard Herring, co-director of Wharton's Financial Institutions Center, says that while the Federal Reserve has indicated the economy faces an equal risk of deflation and inflation, he finds inflation the more likely scenario. The global economy may be about to head into an expansionary period, which would drive up prices for commodities and other goods.



Herring feels that U.S. interest rates may rise if investors grow concerned about large government deficits, or if a declining dollar leads to massive repatriation of foreign investment. However, he says, that does not seem to be an immediate threat.



According to W. Bruce Allen, professor of business and public policy at Wharton, 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. The key question facing the industry is whether big carriers such as United, Delta, and American, will be nimble enough to benefit from the up-tick. During the recent downturn smaller regional airlines, including Jet Blue, Southwest, Air Tran, and Frontier, have been picking up market share in cities where they operate. "Now that people are comfortable with the new carriers, will they go back to the old carriers?" asks Allen.



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.



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, the only impact of the bill in 2004 may be enhanced payments to Medicare managed-care providers and a discount card that gives recipients reduced prices on out-of-pocket drug costs, suggests Mark Pauly, Wharton professor of healthcare systems.



Overall health spending, which topped $1.4 trillion in 2001, the last year for which official figures are available, will continue to outpace inflation at a real rate of 5-7%, Pauly forecasts. Drug spending, which had been driving the rise in health care costs in recent years, may drop off in 2004 as the industry loses patent protection on some key blockbuster therapies. The rate of increase in health care premiums is also likely to slow.



More on Wharton's 2004 predictions.