Thursday, December 30, 2010

Question #4 for 2011: U.S. Economic Growth

by Bill McBride on 12/30/2010 02:19:00 PM

A week ago I posted some questions for next year: Ten Economic Questions for 2011. I'm working through the questions and trying to add some predictions, or at least some thoughts for each question before the end of year.

4) Economic growth: After I took the "over" for 2011 back in November, a number of analysts have upgraded their forecasts. As an example, Goldman Sachs noted Friday, Dec 17th:

The US economic outlook for 2011 has improved further with enactment of the fiscal compromise, as well as a stronger trend in recent data. As we forewarned, we are revising up our forecasts to incorporate this news and now expect real GDP to rise 3.4% in 2011 and 3.8% in 2012 (up from 2.7% and 3.6%) ...
It does appear GDP growth will increase in 2011, although GDP growth will probably still be sluggish relative to the slack in the system. How much will the economy grow in 2011?

For 2010 there were a number of forecasts for a "V-shaped" recovery (4% to 6% real GDP growth range) - and also a number of forecasts for a double dip recession. Both wrong.

I took the boring middle ground: sluggish and choppy growth, but no double dip. The key reasons were 1) recoveries from financial crisis tend to be sluggish, and 2) the drag from residential investment (RI) would be less in 2010 (so a double dip seemed less likely).

There are still plenty of scars from the financial crisis (excessive debt, high unemployment, excess capacity, excess supply of housing, a large number of homeowners with negative equity, and high foreclosure activity), but the economy is slowly healing. And even though residential investment will be weak in 2011, I think RI will make a positive contribution to GDP growth for the first time since 2005. And another sector, non-residential investment in structures, will probably bottom in 2011 based on the Architecture Billings index.

There are still plenty of downside risks: financial contagion from Europe, budget problems at state and local governments, and falling house prices all could lead to slower U.S. growth.

However my guess is growth will be sluggish relative to the slack in the system, but above the 2010 growth rate. Usually I don't forecast a specific number, but for personal reasons I will this year (probably jinxing myself). For 2011 I'll take 3.7% real GDP growth. That is consistent with my employment / unemployment rate forecasts, and that would also be the highest growth rate since Clinton was President (not saying much because the '00s were so bad).

As a reminder - this will not feel like a recovery for the millions of unemployed workers, and for the millions more who are working part time or for lower wages. This will not feel like an economic recovery until the unemployment rate drops sharply and real income for the middle class starts to increase.

Ten Questions:
Question #1 for 2011: House Prices
Question #2 for 2011: Residential Investment
Question #3 for 2011: Delinquencies and Distressed house sales
Question #4 for 2011: U.S. Economic Growth
Question #5 for 2011: Employment
Question #6 for 2011: Unemployment Rate
Question #7 for 2011: State and Local Governments
Question #8 for 2011: Europe and the Euro
Question #9 for 2011: Inflation
Question #10 for 2011: Monetary Policy