Monday, December 13, 2010

Goldman Ups 2011 U.S. Economic Forecast - Chances of Double Dip Recession Dropping

The Wall Street Journal's latest survey of economists released today reveals increased optimism:

"The 55 respondents, not all of whom answer every question, raised their growth projections for gross domestic product for nearly every period, including the current quarter. On average, the economists now predict GDP will grow 2.6% in the current quarter at a seasonally adjusted annual rate, up from the 2.4% growth they projected in last month's survey. The economists now see stronger expansion in the first half of 2011, with growth picking up speed as the year progresses. For the year, they expect GDP will rise 3%. Meanwhile, they have reduced the odds of a double-dip recession to 15%, the lowest average forecast of the year, from 22% in September survey."

Jan Hatizus
Goldman Sachs' Chief Economist, Jan Hatzius, released a new report on the firm's long-term forecast at the end of last week. He believes the GDP growth rate will be 2.7% in 2011 and 3.6% in 2012. Here's the details on Hatzius' forecast:
"The US growth outlook has brightened significantly in recent weeks.   As a result, we have raised our sights for 2011, calling for real GDP growth to average 2.7% for the year versus 2.0% previously.   We expect growth to pick up further in 2012—to 3.6% on average for the year—though judgments that far out are clearly tentative.
The main reason: recent data reveal a firmer trend in domestic final demand and suggest that it will be sustained via improvements in net hiring and credit availability.  Meanwhile, the downside risk of a material tightening in federal fiscal policy—i.e., failure to extend expiring tax cuts—has diminished significantly. Although our revised outlook implies a meaningful drop in the jobless rate, it will remain high by historical standards, ending 2012 at about 8½%.  With other measures of utilization also likely to show significant excess capacity, we expect core inflation to remain at the ½% year-to-year rate in 2012 that we have been forecasting for year-end 2011."
The vast majority of economists are realizing that growth in 2011 is going to be stronger than previously forecast. In short, here's why:
  • An increase in the forecasted growth rate of consumer consumption and business activity. 
  • Larger than expected industrial capital spending.
  • Relatively low inflation.
Here are the remaining issues that pose the largest risk to the 2011-12 recovery:
  • Weak housing sales and near zero building activity.
  • Tepid job growth.
  • Uncertainty about changes to the Obama healthcare plan and financial reforms by the new Congress.
Krause is bullish
"In short, I have been observing the U.S. economy growing the past several months and I think it should continue to pick up steam in 2011. The latest two rounds of economic stimulus - QE2 and the tax compromise - are large and will lead to even more economic growth than is expected by Hatizus, El-Erian, and the other leading macro-economists.  It wouldn't be surprising to me to see GDP growth in 2011 at 3.5+%," said Dr. David Krause, AIM program director. "I believe that 2011 will be a banner year for technology with the continued expansion of 4G and breakthroughs in handheld computing and more productivity enhancing software applications."

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