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Slow Growth for 2011, No Double-Dip Recession, Say Leading Economists

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In the vein of “no news is good news,” a group of economists says its forecast remains the same—slow growth for 2011.

The National Association for Business Economics said it made only modest revisions to its forecasts for the November report compared with its October projections for economic growth.

“Projections for real GDP growth remain sub-par through the first quarter of 2011, but accelerate gradually through the forecast period,” said NABE President Richard Wobbekind, associate dean of the Leeds School of Business at the University of Colorado, in a statement.

Wobbekind says that for next year as a whole, GDP growth is expected to be moderate. Factors restraining growth going forward include ongoing balance-sheet restructuring by consumers and businesses, and a diminished contribution to GDP growth from inventory restocking and government stimulus. Confidence in the expansion’s durability is intact, but panelists remain concerned about high levels of federal debt, a continuing high level of unemployment, increased business regulation and rising commodity prices.

Founded in 1959, the NABE is the professional association for those who use economics in their work. It has 2,300 members and 31 chapters nationwide.

Highlights of the report include:

• The NABE Outlook panel made modest revisions to its economic growth predictions for 2010 and 2011.

Real gross domestic product (GDP) is now expected to advance 2.7% (year-over-year) in 2010, a slight increase from the panel’s October prediction of 2.6%. Next year’s projected 2.6 % GDP growth rate was unchanged from October’s prediction, and, as is typical in a recovery after a severe financial crisis, shows the lack of a more pronounced cyclical rebound. The projected growth rate for 2011 is slightly below the panel’s current estimate of the economy’s long-term growth trend of 2.7 %. The survey respondents’ estimate of trend growth has declined by one-quarter-percentage point since 2007.

• To a large extent, the latest NABE forecast reflects the view that the economy will struggle against financial headwinds. Forty percent of survey respondents—compared to 37%in October—characterize the expansion as “sub-par with severe wealth losses and onerous debt burdens inhibiting spending and lending.” In contrast, 28%of respondents feel that “the economy will overcome its headwinds, and behave more in line with a traditional business cycle expansion: real output will grow at a rate above potential, and households and businesses will boost discretionary spending.” The likelihood of either stagflation or the economy slipping back into recession is viewed as relatively low.

• Consumer spending is expected to remain modest throughout the forecast horizon due to weak job gains, persistently high unemployment, and negligible growth in household net worth. This year’s holiday retail sales are still expected to be weak, rising only 2.5% from those of last year. Roughly half of the panelists expect the personal saving rate to fall over the forecast period, while the other half of the panel is divided as to whether it will rise further or stay at roughly the same rate.

• Labor market conditions will improve slowly. Monthly payroll gains are forecast to average less than 150,000 until the latter half of 2011, at which time gains will improve at a range of roughly 150,000-170,000. Joblessness will remain high, with the unemployment rate persisting at over 9.5% or higher through the first quarter of 2011 before easing—but only slightly—to 9.2% by year-end 2011. This will mark the weakest post-recession job recovery on record. Panelists estimate the current long-run or natural rate of unemployment at 5.8 %, up by one-half-percentage point since 2007.

• The housing recovery is intact, but tepid overall. Housing starts in 2010 will barely improve over last year’s historic low. Although a sizable advance is predicted for 2011, NABE panelists have pared back their expectations for housing starts — from 750,000 in the October survey to 720,000 in the current survey. Home prices appear to have hit bottom, based on the FHFA Index. The NABE Outlook panel’s prediction of a 1.6% home-price decline this year has already been realized through the first half of 2010. Next year’s projected home-price gain of 1.5% will just about match broad measures of inflation. Overall, most panelists generally expect that home prices will be “bumping along at a cyclical low,” although 16% think prices are still trending downward.

• Business spending remains a bright spot in the forecast. The outlook for real spending on equipment and software has edged up a bit since the NABE forecast in October. The panel continues to project sustained double digit growth over the forecast period. The forecast for real spending on structures remains weak, but such spending is now expected to expand 1.8% in 2011—an improvement over the last NABE forecast, which called for a 0.2% contraction. Underpinning these prospects is a solid recovery in after-tax profits of 25% in 2010. Profit gains will moderate in 2011, but remain strong overall—up 7%. Forecasts for profits exhibit little change from the October survey.

• The trade deficit will widen going forward on strong gains in both imports and exports. The outlook for real net exports has worsened somewhat since the October survey, with import growth revised upward and export growth revised downward. Growth in real imports is now expected to exceed growth in real exports both this year and in 2011. As a result, the net-export deficit is expected to exceed $460 billion in 2011. Although the panelists in the November survey forecast that the dollar will weaken further relative to their forecast in the October survey, concerns about competitive currency depreciation are relatively low compared to other issues considered in the forecast.

• Labor productivity growth has begun to slow, but will remain impressive nonetheless, with a 1.8 % gain predicted for 2011. Hourly compensation is projected to advance 2% next year, up from a record-low gain of 1.4% in 2010. With compensation rising only slightly faster than productivity, increases in unit labor costs should be modest.

• Panelists are sanguine about avoiding deflation. For example, core PCE inflation (excluding the volatile food and energy components) is predicted to rise gradually from a projected 1 % at year-end 2010 to 1.5% by the end of next year. When asked about their level of concern about prices, NABE panelists continue to rank “inflation” as a greater worry than “deflation,” but both concerns are overshadowed by other issues, such as the federal debt, high unemployment, and increased business regulation. In addition, roughly a third of panelists view the Federal Reserve’s recently announced plans to purchase additional longer-term Treasury securities as “somewhat diminishing the risk of deflation.” Another third view these plans as “somewhat increasing the risk of undesirable inflation.” Finally, panelists increased their forecast for oil prices somewhat for both 2010 and 2011.

• The federal funds rate will remain near zero until late in 2011 due to the mix of persistently high unemployment and very low inflation. Relative to the October survey, panelists have marked down their forecast for the path of the federal funds rate. The funds rate is now projected to remain below 20 basis points throughout the forecast period—in contrast to the previous expectation of an increase to 50 basis points by year-end 2011. Long-term interest rates will also remain low, with the 10-year Treasury note now expected to yield 3.25% by the end of 2011, compared with 3.75% in the last survey. Next to deflation, “high interest rates” are the lowest concern among NABE panelists going forward. Concern about “tight credit conditions” has eased somewhat relative to the October survey.

• The federal deficit will narrow slightly next year. But even after shrinking by almost $100 billion, it is anticipated to remain very high, at $1.1 trillion. NABE panelists continue to characterize excessive federal debt as their single greatest concern going forward, even exceeding worries about high unemployment, and far greater than concerns about either inflation or defl


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