Nationally Known Economist Gives Thumbs Up on State of Economy, Voices Long-Term Concern Over Federal Deficit

The state of the U.S. economy, including the Philadelphia region, remains solid, as does the short-term outlook, according to nationally known economist Dr. Mark Zandi. But several concerns — the growing federal deficit, continued threats of terrorism , and the skyrocketing cost of healthcare — offer risks for the long haul.

The assessment, offered by the co-founder and chief economist of Economy.com, was presented during a recent gathering of nearly 100 local area residents hosted by the newly formed Charlestown Citizens Forum.

Zandi, whose West Chester-based firm provides analysis to businesses, governments, and professional investors worldwide, pointed to the gross domestic product — the broadest measure of economic activity — as evidence of a favorable economy. The GDP gained an annualized 3.1% in the first quarter and 4% over the last 12 months, figures he termed “healthy.” He noted that the economy added two million jobs in the past year.

“The economy is performing well,” Zandi said, acknowledging some soft spots but voicing optimism for continued growth in the months ahead. He cited strong corporate profits across industries and cash-rich balance sheets that he believes are boosting corporate confidence and will spur new job creation and increased consumer spending. Exceptions to this favorable corporate picture are the domestic automakers and airlines.

Zandi had high marks for the Philadelphia region. Job creation in the area is increasing across sectors, he said, with healthcare and education leading the way. He also noted that the relatively affordable housing costs in the Delaware Valley, when compared to nearby New York and Washington, offer a competitive regional advantage for attracting new businesses and luring companies considering relocation or expansion.

Despite his hopeful outlook, Zandi highlighted several potential trouble spots ahead. Chief among these is the growing federal deficit. The latest administration budget forecasts a record $427 billion deficit for fiscal 2005.

“Deficits really do matter,” he said, contradicting the assertion commonly made by tax cut defenders that the federal deficit has limited impact on the economy. Absent a concerted public policy to lower the deficit, Zandi believes long-term interest rates will rise, the economy will be slowed and necessary spending on public education to keep the American workforce competitive in a global economy will suffer.

“This is an area where it is imperative that we make progress,” he added. He strongly advised that the current tax cuts, scheduled to expire between the end of this year and 2010, not be extended. He projects a $5 trillion annual deficit within ten years if tax cuts are made permanent and current spending trends continue.

A second risk is terrorism. Another attack on U.S. soil approaching the scale of 9/11 would “shatter” corporate outlooks, he said. “We’re seeing 9/11 as the exception, not the norm. Such an attack would be hard for us to overcome psychologically.”

Looking further ahead, Zandi said the rising tide of health care costs in America stands out as “the single most important long-term economic issue for our country — and no one has an answer.” Though quick to state that he too does not know the solution, he called for use of the “open market” as part of any public policy response to the health care dilemma, allowing consumers to “shop” for their health care services.

“Everyone is talking about the possible privatization of Social Security,” Zandi said, “but that will have little bearing with respect to the economy. Overhauling the health care system and fixing Medicare is where we should be placing our attention. Right now we’re complacent, and that needs to change.”

Zandi also expressed concern over inflated oil prices. He pointed to several factors that have driven oil prices to over $50 per barrel, including increased demand by consumers and a slowed response from suppliers, as well as geopolitical issues. He predicted that oil prices will recede in coming months, though not substantially, and urged additional investment in research and development of alternative fuels.