U.S. economic forecast: it’s not over yet

Just as some good news finally came our way in June, increasing our hopes that the soft patch in the economy may finally be behind us, the government’s payrolls report on July 8 indicated that it isn’t over yet. Automatic Data Processing’s (ADP’s) June private payrolls survey had showed that employers had added a solid number of jobs, increasing expectations that the economy has turned the corner, but the Bureau of Labor Statistics’ (BLS’) June nonfarm payrolls report told us otherwise. With only 18,000 jobs created in June and an uptick in the unemployment rate to 9.2%. The BLS’ payrolls report suggests a bleak economic picture for the U.S. in the second quarter and indicates further loss in the economy’s underlying growth momentum.

Not surprisingly, consumers are still depressed and spending is weak. After holding up fairly well in the face of high oil prices, consumer confidence has waned, dampened by the worsening job situation over the past two months. Vehicle unit sales hit a 12-month low in June, partly as a result of the Japan crisis, while other consumer spending has slowed down under the pressure of higher commodity prices and job concerns.

The housing market also remains depressed. While we expect housing starts to increase in 2011, they likely will remain dismal by normal standards. We also expect the overhang of unsold homes to worsen as foreclosure delays end. We do, however, expect some increase in house prices (finally) later this year, though after a few more months
of declines.

Business investment will likely be mixed for 2011, with equipment spending continuing to rise and nonresidential construction remaining weak. We expect that nonfinancial firms’ high cash balances, the still-low interest rates, the government incentives, and manufacturers’ need to improve productivity to compete in the difficult world market will boost equipment spending. Meanwhile, high vacancy rates in commercial real estate, while improving, will slow construction this year.

Concerns that Congress won’t act with the economy’s best interest in mind has increased. A short government shutdown due to politicians’ unsettled deficit dispute isn’t likely to have much effect on the economy. But if the shutdown extends to weeks, the economic disruption could be significant. The impact on economists could be severe, since no new data would be available in the interim. In addition, an even more disruptive and senseless
economic crisis could occur as a result of Congressional disputes over raising the debt ceiling. While we assume that Congress will reach a compromise in time, the clock is ticking.

All of these issues will certainly keep the Federal Reserve wary when raising interest rates. Moderate inflationpressures would give the Fed more leeway to keep interest rates at near-zero levels. With the current soft patch
lasting longer than the Fed had hoped, it is likely that the Fed won’t raise interest rates until later next year. But the Fed has signaled that it will consider further easing, including another round of quantitative easing.

To see my full U.S. economic forecast click here.


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