Macroeconomic Forecast Paper

This paper will discuss the macroeconomic forecast information from the following sources; Conference Board, Mortgage Banker's Association and TD Waterhouse. The analysis of the information will discuss unemployment rates the GDP, inflation rate, and interest rates projected out for the next two years. We chose to examine the pharmaceutical industry for our projection of the economic situation of the US over the next two years.

The three sources indicate that the Real Gross Domestic Product will be around the 3.1 - 4.0 percent in 2005 and 2006. In the fourth quarter of 2004, the real GDP was about 4.4 - 4.8%, which meant that it ended the year on a strong note, compared to what was expected.

When the GDP is on the rise or steady the economy is producing at a positive level, however with the projection for 2005 and 2006, the economy is expected to keep struggling. Analysts indicate that in order for the economy to be strong the GDP has to be higher than 5.0%. However, analyst have pointed out that the diminishing monetary and fiscal stimulus, pressures from an overstocked housing market, and rising bond yields will take some wind out of the U.S. economy's sails, resulting in a deceleration in GDP growth to less than 3% on average in the second half of 2006. These disappointingly low rates are less than the 3.7 percent average annual growth rate in real GDP over the last economic expansion (from 1991 - 2000).

According to the Conference Board, Mortgage Banker's Association and TD Waterhouse the unemployment rate should remain steady. Currently the unemployment rate is about 5.5%, the projected unemployment rate is expected to be between 5.3 - 5.5% for 2005 and 2006. The economic model indicates that a 5.3 percent rate of unemployment represents full employment for the economy. While the national economy did see much lower unemployment rates from 1997 - 2001, during the dot-com era, rates this low might not be able to be prolonged.

During the first and second quarter of 2004 the prime interest rate was about 4%, currently it's about 5.25%, the projection prime interest rate for 2005 and 2006 is between 5.25 - 5.75%. The current interest rates for a 30 year conventional home loan mortgage is about 5.69%, however the expected rate for 2005 and 2006 is projected between 5.70 - 6.50%. It seems that the interest rate for 2005 and 2006 will be on the rise and perhaps slow down the housing market frenzy. With interest rates on the rise, consumers will seek other types of investments, besides the real estate market.

On a more positive note for business investments will come early in 2005. The 2003 Bush tax package contained incentives aimed at boosting machinery and equipment investment, which will expire at the end of this year. Since corporate profits rose at a double digit rate in 2004 for the second year in a row and net cash flow in the corporate sector, which means that businesses are well-positioned to continue investing in new machinery and equipment. The only upside risk to the forecast is that machinery and equipment will grow even faster than the 10% rate that has been anticipated on average in 2005 - 2006. However, overall business investment will expand by a slower 8-9% over the same period, reflecting a still slow growth in the economy.

The bottom line is that the U.S. huge deficit problem and rising interest rates is likely to persist for some time, indicating that the strains of financing it will continue to dog the U.S. economy well beyond 2006. However, it seems those currently large corporations are still recording huge profits and are projected to continue this trend for least the next two years, with Bush's tax package incentives aimed at purchasing machinery and equipment.

The U.S. Economic Forecast*, September, 2004 - Revised

2004 2005 2003 2004 2005

II Q* III Q IV Q I Q II Q III Q ANNUAL ANNUAL ANNUAL

Real GDP 2.8 3.7 5.2 6.1 4.6 4.0 3.0 4.4 4.7

CPI Inflation 3.0 3.2 3.3 3.4 3.5 3.8 2.3 2.5 3.4

Real Consumer Spending 1.6 4.0 4.8 4.7 4.8 4.1 3.3 3.7 4.4

Unemployment Rate (%) 5.6 5.4 5.2 5.0 4.8 4.6 6.0 5.5 4.7

90 Day T-Bills (%) 1.01 1.50 1.59 2.04 2.89 3.59 1.01 1.25 3.25

10 Yr Treas Bonds (%) 4.55 4.31 4.69 4.94 5.30 5.40 4.02 4.39 5.32

*** Current $ Level With IVA & CCA

*Seasonally adjusted, annual rates except where noted.

Source: The Conference Board

Discussion of the Pharmaceutical Industry and Macroeconomic Variables

The pharmaceutical industry is a critical component of the chemical enterprise. The industry employs a huge number of research chemists; indeed, the pharmaceutical industry has been for some time the most vibrant employment marketplace for chemists. Big pharmaceutical company's R&D expenditures dwarf those of the traditional chemical industry. Pharmaceutical and biotech industries are the major customers of the fine and custom chemicals segment of the chemical industry.

Make no mistake; pharmaceuticals are a very good business to be in. According to Class, the industry saw its global sales rise 9% to reach $491.8 billion in 2003. Although the 9.7% growth earnings for the first nine months of 2004 at the pharmaceutical companies C&EN tracks is off from the giddy levels seen at the end of the 1990s, it is growth that most other industries can only dream of. The 22.3% profit margin seen at those companies through the first three quarters of 2004 is spectacular by any standard. In the U.S. alone, a preliminary estimate from business information and consulting firm IMS Health shows that drug sales in the U.S. will be up 9.5% in 2005 to $259 billion. That's a tad better than 2004, with estimates showing sales rising 9%, but it's hardly a stellar performance. The industry hasn't posted single-digit growth since 1994. This steady growth in sales came despite an atmosphere of cost containment, poor research and development productivity, and the loss of exclusivity for some major products.

In the U.S., the pharmaceutical industry is a significant employer. The biotech industry alone provided jobs for 413,000 in 2004. According to a study from the Milken Institute in October, supported in part by PhRMA, the biotech industry will add 122,000 jobs and $60 billion in real out put to the U.S