Economists say US entering new cycle of prosperity.

The U.S. economy in 2005 is entering a new cycle of prosperity that may be more efficient-and thus more sustainable-than that of the mid-1990s, it was forecast by Diane Swonk, chief economist for Mesirow Financial, at the financial services firm's first annual Economic Outlook and Forum.

Speaking to a gathering of 350 clients and reporters, Swonk, who joined Mesirow Financial as chief economist last month, forecast the country's 2005 economic health.

Introducing Swonk and six of Mesirow Financial's other experts on various market segments, the firm's CEO, James C. Tyree, announced that the event establishes a continuing tradition of forums designated to share views on the year ahead in the areas of equity, fixed income, hedge funds, private equity, currency and real estate.

"I expect inflation will continue to abate, aided by lower oil prices, increased productive capacity and the ongoing push to lower unit labor costs," adds Swonk.

"Interest rates are expected to rise, but still remain near historic lows. The U.S. dollar will remain weak and foreigners will be more willing to hold dollar-denominated assets once the returns associated with higher productivity growth begin to work their way through the system," says Swonk.

Swonk's full commentary can be read in her January, 2005 issue of Themes on the Economy.

At the event, professionals from Mesirow Financial's Investment Management and Real Estate divisions added to Swonk's outlook with predictions in their niche areas:

* Equities (forecast by Michael Crowe, senior managing director, Mesirow Financial Investment Management) "The current equities market, as defined by the S&P 500, is not cheap at 18x forecasted 2005 earnings per share (EPS). No sustained bull market has ever begun from such lofty valuation levels. In 2005, we expect to see high single-digit returns from the S&P 500.

Dividend income will, once again, be significant as payout ratios continue to rise. The out performance of small cap stocks and value stocks will continue in 2005."

* Fixed Income (forecast by Bill Gossard, managing director of Mesirow Financial Investment Management) "The Fed funds rate will reach 3 1/2% by the end of 2005 in comparison to 2 1/4 % at close of 2004. We anticipate the 10-year Treasury Bond yield to reach 5 1/4% by the fourth quarter of 2005.

The yield spreads between corporate bonds and mortgage-backed bonds will likely widen as a result of economic growth and a changing credit cycle. Investors will see real value by buying municipal tax-exempt bonds."

* Hedge Funds- (forecast by Steve Vogt, senior managing director, Mesirow Financial Advanced Strategies) "We remain slightly more optimistic than other market commentators in our prediction of 7% to 9% returns in hedge fund of fund strategies.

This will be led by hedged equity and hedged credit strategies such as long/short debt, capital structured arbitrage and specialized credit strategies. Meanwhile, long-biased, distressed debt opportunities and most relative value opportunities will likely to be muted in 2005."

* Private Equity (forecast by Marc Sacks, senior managing director, Mesirow Financial Private Equity) "2005 will be strong on all private equity fronts including fundraising, new investment activity and liquidity.

A moderate and stabilizing venture capital investment pace bodes well for future returns. We expect over $9 billion will be raised by more than 100 venture-backed IPOs in 2005, with as much as $115 billion in private equity partnership capital raised during this year.

Private equity performance dispersion will remain very wide among managers, making access to top-tier private equity funds critically important in constructing highly-performing private equity portfolios."

* Currency (forecast by Gary Klopfenstein, senior managing director, Mesirow Financial Currency Management) "The only certainty in the currency markets for 2005 is that they will be volatile. I expect that the euro will reach as high as 1.42 and the dollar against the yen will be as low as 90 at some point during the year."

* Real Estate (forecast by Richie Stein, senior managing director, Mesirow Stein)-"Interest rates will continue to impact real estate returns. If rates rise faster than job recovery can spur leasing, property values could continue to fall through the job recovery. Office market recovery will be slow as a result of the extended jobless recovery and shadow space which is estimated at 10%.

In 2005, overall vacancy rates in Chicago's central business district will hover near 18%.

By 2006 they will decline to 17% and the national average will be in the 13% range. Gross rental rates in Chicago will not experience any positive growth until 2006, and even then in the low 1% range."