How good will the economy be in 2004? So good that prices might go up a bit.

Bob Doll, chief investment officer of Merrill Lynch Investment Managers, told investors that “capital spending has decisively turned, job growth has begun, and export markets are awakening.”

That rosy analysis comes with a somewhat unsettling caveat.

“Oil, gold and other commodities continue to move up in dollar terms,” Doll said.

While the correlation isn’t perfect, a rise in prices for commodities such as petroleum can lead to inflation.

We’ll see if that has started on Wednesday when the producer price index numbers for December are released, and again on Thursday when the consumer price index results come out.

Inflation has been a no-show for years, leading to low mortgage interest rates. In turn, that ignited a boom in home construction and sales.

The nation’s factories have contributed to low inflation, whether they like it or not. Manufacturers have been unable to raise prices for years, largely because of low domestic demand and competition from abroad.

That has led to the loss of hundreds of thousands of manufacturing jobs in recent years.

Sherry Cooper, global economic strategist for BMO Financial Group, thinks the country is turning the corner on manufacturing, and she expects the job market to strengthen as a result. In her view, companies will resume spending on new equipment as other businesses increase inventories.

“Businesses are now poised to increase hiring,” Cooper said. “Leading indicators suggest a significant improvement in the job market, even in the beleaguered manufacturing sector.”

The nation’s exports are apt to brighten, Cooper added.

“The considerable decline in the U.S. dollar will also boost net exports, finally reducing the trade deficit,” she said.

Friday brings three important reports on the health of manufacturing.

Capacity utilization will measure how much of the nation’s industrial infrastructure was put to use last month.

Brokerage house Charles Schwab observed that November’s numbers were much improved, and predicted the trend could continue.

“Manufacturing inventories are lean, so the pickup in demand should lead to a near-term acceleration in production gains and a far stronger industrial side to the economy,” Schwab said.

Also scheduled to be released Friday are industrial production figures for December and the state of business inventories in November. Both are expected to show at least some improvement.

Even the nation’s exports, which are woefully less in value than its imports, are apt to brighten, economist Cooper said.

“The considerable decline in the U.S. dollar will also boost net exports, finally reducing the trade deficit,” she said.

If the turnaround really has begun, it may become visible in another report due out this week.

On Wednesday, the trade deficit for November will be announced. Anything less than $40 billion will be an improvement over recent months.

The trade deficit could eventually head down, economists say. The dollar has weakened in relation to the euro, making U.S. goods and services cheaper and foreign competition more expensive.

On Thursday, retail sales for December, the most important shopping time of the year, are due for release.

Analysts expect sales rose 6 percent from a year earlier.

ShopperTrak, which closely follows retail sales, said the 2003 holiday season was the strongest since 1999.

“Holiday sales came through in a big way late in the season,” said Michael Niemira, chief economist for the International Council of Shopping Centers.

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(c) 2004, Chicago Tribune.

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AP-NY-01-09-04 1900EST