U.S. Recovery Approaches One-Year Anniversary in Good Shape
May 2010
SUMMARY: NABE panelists marked up their predictions for economic growth in 2010 and expect performance to exceed its long-term trend this year and next. “Although risks involving Europe have recently escalated, the outlook in this country has improved in most respects. Growth prospects are stronger, unemployment and inflation are lower, and worries relating to consumer retrenchment and domestic financial headwinds have diminished,” said NABE President Lynn Reaser, chief economist at Point Loma Nazarene University. “The economy is in reasonably good shape as the recovery approaches its first anniversary, but forecasters remain ‘extremely’ concerned about large federal deficits going forward.”
- The NABE forecast panel has boosted its expectations for growth in 2010 to 3.2 percent for real GDP from 3.1 percent in its February forecast. The panel is also predicting a 3.2 percent pace of real GDP growth for 2011, meaning a sustained two-year stretch in excess of the economy’s potential—or “trend’—rate of growth. The panel estimates the economy’s potential rate of growth at 2.8 percent over the next five-year period. NABE panelists date the expansion as nearly one year old, with the trough of the previous recession in June of 2009.
- Many of the forecasters believe that the traditional cyclical forces of pent-up demand and inventory building are becoming more important. Although financial headwinds will temper the pace of growth, concerns about credit conditions have eased somewhat compared to February’s survey. Inflationary pressures are expected to gradually build, but a “stagflation” scenario—a combination of slow growth and high inflation—is considered highly unlikely.
- Job growth is now on a steady footing. Except for a third-quarter slowdown related to a reversal of Censusrelated hiring, job gains are expected to remain robust throughout the forecast horizon, as output gains remain steady but productivity gains progressively slow. The jobless rate is forecast to steadily decline to 9.4 percent by yearend 2010 and 8.5 percent by year-end 2011, though it remains high by historical standards and is ranked by panelists as their second greatest “concern.” Additionally, NABE panelists increased their estimate of the unemployment rate consistent with full employment to 5.5 percent from 5.0 percent previously.
- The dollar will retain much of its recent gains vis-à-vis both the euro and a trade-weighted basket of foreign currencies. With respect to the risk of a Greek default, views are mixed. Fifty-one percent believe that a default will not occur, though some debt restructuring will be required. Twelve percent expect outright default within the next twelve months and 37 percent expect default after some short-term maneuvering only buys time. (It should be noted that these responses were collected prior to the May 9 announcement by the EU, IMF, and ECB of the program to address the European financial crisis.) As for China, forecasters assigned a 30 percent probability to it presently experiencing a “bubble,” though there was a wide dispersion on this. The top quartile assigned a 60 percent probability of a bubble, while the bottom quartile assigned only a 20 percent probability.
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