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Tuesday, May 04, 2010

The 2nd Half Slowdown

by Calculated Risk on 5/04/2010 04:50:00 PM

There are several analysts forecasting GDP growth to pick up in the 2nd half of this year, with annual GDP growth of over 4% for 2010 (the advance Q1 GDP estimate was 3.2%, so over 4% for 2010 would require a nice pick up in the 2nd half). This is not a "v-shaped" recovery - that didn't happen - but these forecasts are still above trend growth.

Unfortunately I think we will see a slowdown in the 2nd half of the year, but still positive growth. Last year I argued for a 2nd half recovery ... and that was more fun!

Here are a few reasons I think the U.S. economy will slow:
1) The stimulus spending peaks in Q2, and then declines in the 2nd half of 2010. This will be a drag on GDP growth in the 2nd half of this year.

2) The inventory correction that added 3.8% to GDP in Q4, and 1.6% to GDP in Q1, has mostly run its course.

3) The growth in Personal Consumption Expenditures (PCE) in Q1 came mostly from less saving and transfer payments, as opposed to income growth. That is not sustainable, and future growth in PCE requires jobs and income growth. Although I expect employment to increase, I think the job market will recover slowly (excluding temporary Census hiring) because the key engine for job growth in a recovery is residential investment (RI) - and RI has stalled (until the excess housing inventory is reduced).

4) There is a slowdown in China and Europe has some problems (if no one noticed) ... and that will probably impact export growth, and also negatively impact one of the strongest U.S. sectors - manufacturing (when was the last time manufacturing was one of the strongest sectors?)

Of course monetary policy is still supportive and it is unlikely the Fed will sell assets or raise the Fed Funds rate this year. Maybe some commodities like oil will be cheaper and give a boost to the U.S. economy ... maybe the saving rate will fall further and consumption will continue to grow faster than income ... maybe residential investment will pick up sooner than I expect ... maybe. But this suggests a 2nd half slowdown to me.