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News : US Economy Last Updated: Dec 10, 2010 - 2:28 AM


US economic growth expected to be modest in 2011; Forecasts revised above 3% after tax deal
By Michael Hennigan, Founder and Editor of Finfacts
Dec 9, 2010 - 4:07 AM

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Economists at the Hamilton Project of the Washington DC think-tank, the Brookings Institution, say that up until the early 1970s, virtually all prime-aged men were gainfully employed - - regardless of whether they had a high school diploma or a college degree. Over the last 40 years, however, the United States has witnessed a dramatic change in the employment situation for men, particularly for less-educated workers who have faced greater challenges finding jobs and have increasingly dropped out of the labour force.

As shown in the chart above, while employment rates for men with bachelor’s degrees have declined only slightly, employment of men with only high school diplomas has fallen considerably -- from a high of 97% in 1967 to just 76% today. (These figures exclude incarcerated men - - in 2009, 3.4% of men ages 30-50 with high school degrees were institutionalized, versus only 0.3% of men with college degrees.) Source: Brookings Institution

US economic growth is expected to be modest in 2011 and following President Obama's announcement on Monday of a tax deal with the Republicans, several economists have revised up their forecasts. 

The President shocked fellow Democrats when he announced a deal with Republicans to extend Bush-era tax cuts for all taxpayers, including the wealthy. In return, the Republicans agreed to support an extension of expiring unemployment benefits and a temporary cut in workers' share of the Social Security payroll tax.

The prospect of foregoing the chance to cut the deficit by $1trn, triggered a sell-off in bonds and the Wall Street Journal reports today that the yield on the 10-year Treasury bond, a benchmark for US consumer and corporate borrowings, hit its highest level since June, peaking at 3.33% before settling at 3.236%.

Prof. Robert Frank of Cornell University says that according to research from Moody's Analytics, the top 5% of Americans by income account for 37% of all consumer outlays. Outlays include consumer spending, interest payments on installment debt and transfer payments. By contrast, the bottom 80% by income account for 39.5% of all consumer outlays.

He says it is no surprise, of course, that the rich spend so much, since they earn a disproportionate share of income. According to economists Emmanuel Saez and Thomas Piketty, the top 10% of earners captured about half of all income as of 2007.

The wealthiest 1% of the population earn 19% of the income but pay 37% of the income tax.

SEE: Finfacts article; America: A country you cannot tell a lie about

“I’ve said before that I felt that the middle-class tax cuts were being held hostage to the high-end tax cuts,” PresidentObama said on Tuesday. “I think it’s tempting not to negotiate with hostage-takers, unless the hostage gets harmed. Then people will question the wisdom of that strategy. In this case, the hostage was the American people, and I was not willing to see them get harmed.”

JP Morgan Chase economists on Tuesday said the plan could boost growth by half a percentage point next year to 3.5%. Goldman Sachs economists said the effect would add at half a point to a full percentage point on top of its forecast of 2.7% growth next year. Deutsche Bank economists said the payroll-tax cut alone could provide a boost of 0.7 percentage point above the 3.3% growth expected next year.

The US economy is expected to grow only modestly through next year, a Reuters poll published Wednesday showed.

US gross domestic product (GDP) will grow at a 2.0% annualized rate in the current quarter, the same pace as the third quarter and unchanged from the consensus last month, according to the median forecast from almost 70 economists.

Growth is expected to accelerate to an annualized 2.2% in the first quarter of next year, and 2.5% in the second quarter of 2011, also unchanged from the last poll.

In the October poll, only 11 of 69 economists correctly predicted the 2.0% growth rate for the third quarter of this year. Most were too pessimistic.

Nearly 6m Americans looked for work but weren’t able to find employment at all in 2009, a new report shows.

The Labor Department’s report on work experience in 2009, issued on Wednesday, highlights the long-term unemployment problem that’s likely to linger for years. Some 5.8m job-seekers were without work for the entire year in 2009, an increase of 2.7m from a year earlier.

The majority of those unemployed for the entire year, nearly 57%, were men.

Long-term unemployment - -  people out of work for 27 weeks or more - -  has been at the highest level since at least 1948. Of all those unemployed, 41.9% had been out of work for more than six months as of November.

The Brookings Institution's Hamilton Project has examined the “job gap,” or the number of months it would take to get back to pre-recession employment levels (while absorbing the 125,000 people who enter the labour force each month).

Michael Greenstone, director, The Hamilton Project and Senior Fellow, Economic Studies and Adam Looney, Senior Fellow, Economic Studies, and Policy Director, The Hamilton Project say that in November, the job gap remained basically unchanged from October’s gap of 11.8m jobs.

If the economy adds about 208,000 jobs per month, the average monthly rate for the best year of job creation in the 2000s, then it will take 143 months, or about 12 years to close the job gap. At a more optimistic rate of 321,000 jobs per month, the average monthly rate for the best year of the 1990s, the economy will reach pre-recession employment levels in 60 months, or about 5 years.

One of Wall Street's top economists discusses the direction of the economy, with Dick Berner, Morgan Stanley, and CNBC's Steve Liesman:

Moderate acceleration still on track.  In a report published this week, Richard Berner, the chief US economist at investment bank Morgan Stanley, said most incoming data have been somewhat stronger than expected, with 3Q GDP growth at 2.5%, and a further pick-up in 4Q is likely (MS is expecting annualised 4Q growth at 3.5%).  Finally, it appears that the fundamentals are working to improve final demand: Despite disappointing November employment data, job and income gains are boosting income and thus consumer spending; pent-up demand and favourable financial conditions are helping capital spending; and a reacceleration in global growth appears to be helping net exports.  (Some of the acceleration seen in 4Q is purely statistical, reflecting the seasonal quirks in US net exports; MS expects net exports to add 2.6% to GDP this quarter, following subtractions of 3.5% in 2Q and 1.8% in 3Q). 

But two headwinds seem likely to restrain growth to 3% next year. Berner says housing markets and housing activity are weak and, barring aggressive new policy actions, are likely to remain so through 2011.  Home prices may slide by another 10%.  And while state and local government revenues have begun to rebound, those governments are still apt to raise taxes and cut spending.

Weak November employment data understate gradual labour market improvement... The economist says there were few bright spots in thee November data: Payroll growth slowed, the workweek was flat and the unemployment rate ticked higher to 9.8% as employment measured by the household survey declined by 173,000.  The surprising softness in jobs was broadly based, although some sectors (such as retail trade) may have been influenced by faulty seasonal adjustment.  The only bright spot in the report was a 40,000 rise in temporary help employment - - reinforcing the trend that has been evident in recent months and consistent with an underlying pick-up in labour demand.

...but imply below-trend November readings on income and production. Hours and earnings were weaker than expected, leading to only a 0.1% rise in aggregate weekly payrolls, and implying that personal income growth is likely to be below trend in November.  Meanwhile, the index of manufacturing hours slipped 0.1%, suggesting that industrial production is also likely to show only a sluggish advance in December.

More than a trillion dollars is sitting in corporate coffers, but that won't last for long, says Michael Thompson, Standard & Poor's:

Gap between November employment data and forecasts was not unusually large.  Berner says last Friday's disappointing employment data triggered a number of enquiries along the lines of "How could expectations be so far off?"  He says to be sure, the report was definitely weaker than expected, but it was hardly a remarkable event from the standpoint of historical comparisons.  For example since 2004, the average absolute error has been 55,000 and the standard deviation of the misses has been 67,000.  So, the November miss of a little over 100,000 is well within a couple of standard deviations.  Moreover, the miss would be even smaller if you incorporated the 38,000 net upward revision to September/October.

Future revisions may take November payrolls higher.  The economist says it's also important to keep in mind that the initial print can change significantly over time.  For the past several months, the payroll data have been consistently revised higher, largely reflecting the impact of contemporaneous seasonal adjustment.  From a longer-term perspective, a number of factors can lead to significant changes to the initially published estimates - - including benchmark revisions that correct for inaccuracies in the birth/death adjustment.  Most of the larger revisions have been attributable to the benchmark revisions, and these tended to be in an upward direction when the economy was growing and a downward direction when the economy was in recession.  

Hand-off from productivity-led recovery to sustained growth still underway.  Berner says the bottom line is that there isn't a good explanation for the weaker-than-expected results in November.  But MS believes that a broad array of indicators are pointing to an upswing in employment growth and a gradual underlying decline in the unemployment rate. In particular, companies appear to have pushed productivity about as far as they can during the early stages of this recovery, and if the demand side of the economy is sustained (as the most recent retail sales results imply), then hiring should follow. Thus, MS expects to see the hand-off from productivity-led growth to an expansion sustained by job and income gains continue to play out over the course of coming months.

The Fed still expects very low core inflation.  The continued slide in core inflation through October to 0.6% in terms of the CPI and 0.9% as measured by the Fed's preferred gauge (the PCE price index) leaves it well below the Fed's comfort zone.  Berner says while the Fed doubtless welcomes the rise in market-based inflation expectations, it's not sufficient to make officials comfortable with the inflation outlook; indeed, the rate-setting FOMC's (Federal Open Market Committee) central tendency of only 1.3% core inflation in 2012 and 1.6% in 2013 strongly suggests that it isn't thinking of an exit strategy from its current policy stance any time soon. 

Reinforcing the Fed's conviction in QE2.  Most important from the Fed's standpoint, the unemployment rate, at 9.8% in November, is unacceptably high, and much stronger, sustained economic and job growth will be needed to change that reality.  Berner says a continuation of QE2 (bond buying) is data-dependent, and it's a long way between now and June, so he is hesitant to draw any long-term policy implications from the November jobs report.  However, he concludes that based on the MS forecast of sustainable growth and a clear bottoming in core inflation, he still expects the buying program to cease in June.

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