Monday, January 10, 2011

Fed's Lockhart: Sustainable Growth despite Headwinds

by Bill McBride on 1/10/2011 01:07:00 PM

From Atlanta Fed President Dennis Lockhart: The Economy in 2011: Sustainable Growth despite Headwinds

Here are the the "key points":

• According to Lockhart, the economy seems to have gained durable momentum. Growth in gross domestic product, personal income, and jobs should be better this year compared with 2010. Lockhart thinks that although the growth pace is likely to remain relatively modest, economic performance could surprise on the upside.

CR Note: that is close to my view.

• In Lockhart's view, the recovery continues to be constrained by headwinds, especially the interplay among the housing market, household finances and consumer spending, ongoing credit market repair, and lingering uncertainty restraining business and consumer spending. Lockhart believes these headwinds to a significant degree reflect structural adjustments that in the longer term will place the U.S. economy on a stronger footing.

CR Note: I think the key headwinds are 1) housing market issues, 2) State and local government cutbacks and debt, and 3) European financial issues.

• Lockhart believes the housing market will be slow to improve. Weakness in the housing market, especially the downward trend in home prices, has been restraining consumer spending. Consumers have been reducing debt and saving more, and this process of deleveraging may continue for some time.

CR Note: I agree. And like Lockhart, I think residential investment will be sluggish in 2011, but will add to GDP and employment growth for the first time since 2005.

• In Lockhart's opinion, the credit system is not yet back to full health, but the stage is set for some credit expansion in 2011.