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IMF Cuts U.S. Growth Forecasts through 2011

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The International Monetary Fund cut its forecast for growth in the United States through 2011, predicting a lackluster rebound hurt by low consumer spending.

The U.S economy has grown 2.6% thus far in 2010, down from the 3.3% projected in July, the IMF said today in its World Economic Outlook report.

“The U.S. economy is recovering, thanks to unprecedented macroeconomic policy stimulus, emergency financial stabilization measures, and a modest cyclical upswing,” the IMF said in its report. “But the rate of expansion is beginning to moderate. Moreover, high frequency indicators suggest a weak recovery in coming quarters.”

The report goes on to state that much of the weakness of this recovery is due to sluggish personal consumption—by far the biggest component of U.S. GDP, and it cites several reasons.  First, household net worth has deteriorated sharply. House prices have fallen by 25% to 30% over the past three years (depending on which index is used), with the brunt of the adjustment falling on households that have the highest marginal propensity to consume.

Second, unemployment is high: it is currently 9.6% of the work force; a broader measure of unemployment (which takes into account those seeking full-time jobs but finding only part-time work) is 16.7%; and the median duration of unemployment, 20 weeks, is nearly twice the peak level of the previous 40 years. A weak labor market hits incomes and the ability to obtain credit, and it raises job uncertainty for those currently employed.

Third, banks are still reluctant to lend to consumers, restricting credit for larger purchases, as they struggle to reduce leverage and restore balance sheets.

Overall, given the unusually low savings levels before the crisis and the steep decline in personal net worth since, the report says the desire to save is more likely to stay elevated relative to pre-crisis levels. The personal saving rate since the beginning of 2009 has  averaged 6%—a level last seen in 1995—and is projected to remain at about 4% to 6% percent through 2015.

In a related matter, Bloomberg reports Goldman Sachs Group Inc. said the U.S. economy is likely to be “fairly bad” or “very bad” over the next six to nine months.

“We see two main scenarios,” analysts led by Jan Hatzius, the New York-based chief U.S. economist at the company, wrote in an e-mail to clients. “A fairly bad one in which the economy grows at a 1 1/2% to 2% rate through the middle of next year and the unemployment rate rises moderately to 10%, and a very bad one in which the economy returns to an outright recession.”


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