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National economic conditions will continue to favor growth over the next three years. Increased business investment will combine with rising industrial production, expanding exports, and moderate increases in consumer spending to grow the economy. The rate of inflation is expected to increase as well. The rate of real (inflation-adjusted) growth will moderate compared to strong economic growth during 2004. Real gross domestic product will grow 3 percent to 3.5 percent over the next three years. High oil prices will remain a drain on the economy, siphoning spending from domestically produced goods and services. Fuel prices are expected to remain at recent high levels throughout 2005 and 2006. Export growth also will remain moderate despite depreciation of the dollar. The Federal Reserve will continue its shift from a progrowth to a neutral monetary policy. The federal funds rate should rise another 0.5 to 1.0 basis points over the next year. Growth in federal spending should moderate from near double-digit growth in 2002 through 2004. Federal spending is expected to continue to expand rapidly, however, and deficits should remain near current levels. Recent increases in the core inflation rate (excluding food and energy prices) are expected to hold over the forecast period. The inflation rate is expected to average 3 percent per year. Rising inflation will lead to a greater divergence between real and nominal growth rates. Nominal income and sales will grow quickly relative to recent years even as real (inflation-adjusted) growth rates moderate. For example, with inflation running 3 percent per year, nominal income will grow between 6.0 percent and 6.5 percent during the forecast period.


Published in Business in Nebraska, Volume 60, No. 680, May 2005. Presented by the UNL Bureau of Business Research. Used by permission.