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Upgrading Our U.S. Growth Forecasts for 2011: A Preview of Our Forthcoming U.S. Economic Outlook
By Prajakta Bhide, Christian Menegatti and Nouriel Roubini
- We have upgraded our 2011 forecasts for U.S. GDP growth from the previous 1.8% to 2.3%—with stronger growth in H2 2011. We foresee headline inflation at 1.6% in 2010 and 1.2% in 2011.
- The tail risk of a double-dip now is now much lower than before: around 15-20%.
- The probability of a baseline U-shaped recovery remains at 60-65% and the upside risk of above-trend growth is now 15-20% for 2011 and possibly higher—but not much above trend—for 2012 (although far away from a V-shaped recovery…)
Note that our 2.3% U.S. GDP growth forecast for 2011 remains below the consensus view, which expects 2011 growth of 2.5%.
Even with this upward revision, the story that we have been telling all along still holds. The recovery remains rather weak, and certainly far from V-shaped. This rate of growth is consistent with a pace of job creation that will most likely be enough to absorb increments in the work force, but will not be enough to push down the unemployment rate significantly—unemployment will remain north of 9% in 2011. At the same time, inflation will still remain well below the implicit 2% Fed target of core PCE for quite some time. This implies no change in Fed policy; i.e. completion of the large-scale asset-purchase (LSAP) program and then some…
We still expect household deleveraging to continue (consumption will average 2.6-2.7%) and housing to remain under pressure—even with demand very slowly recovering and supply having bottomed out some time ago, inventories remain very large and downward price pressure will continue. Home prices could fall another 5-6% in 2011.
Government and trade will not contribute to growth in 2011 and might actually subtract from it.
In sum, here are the reasons for the upgrade:
- Better macro data in general
- A stronger labor market
- Housing demand and supply have bottomed out
- Car sales will get stronger as a result of pent-up demand
And here are some downside risks to our 2011 forecast:
- Inventory adjustment in H1 2011
- Fiscal drag throughout 2011
- Excess capacity leading to modest capital expenditure
- Housing is double dipping and the fall in prices will lead to more negative equity
- Bank credit is still anemic as 900 banks remain in trouble and much uncertainty surrounds losses
- Net exports will not improve much if the dollar doesn't weaken further
- Risks of global financial contagion from possible adverse developments in the eurozone