US Consensus GDP forecast January 2011

The consensus 2011 GDP forecast for the US economy has been revised systematically higher in the past few months. It currently stands at 3.1% for 2011, but as recently as October 2010 it was down at 2.4%. During Q3 2010 a wide range of key US economic data was under pressure and fears of a double-dip recession dominated many economic discussions. (The regular ‘doom and gloom’ writers/analysts were having a ball. Discussions included the need for not just QE2, but also QE3). At that point, some of the surveyed analysts were forecasting a return to negative economic performance (a decline in US GDP).

Since Q3 2010, a number of key US economic variables have improved noticeably and none of the surveyed analysts now expect a decline in US GDP over the next four quarters. (Happily the ‘doom and gloom’ writers/analysts are either having to sharpen their pencils, or are focusing their attention on the Euro-area).

The improved US economic data includes:

• Leading economic indicator (average monthly performance on the rise, see chart attached)
• ISM manufacturing index (now at 57.0 compared with 54.4 in Sep 2010)
• Industrial production (monthly rate of change now positive)
• Capacity utilization (now at 76.0%. Highest since August 2008)
• Core orders for durable goods (trending higher)
• Retail sales (has surprised on the upside recently)
• Consumer income (continues to improve)
• Lower household debt servicing costs
• Weekly jobless claims (almost back down at 400 000)
• Exports (highest since 2008)

This does not mean that the US economy is firmly on track to return to previous growth rates. There remain a number of key structural economic concerns; including an over-supply of housing with further declines in house prices (home foreclosures remain a major problem); excessively high debt levels especially within the public sector including State debt; a high level of unemployment and under-employment; an aging infrastructure; and an excessive liquidity overhang/monetary stimulus that will eventually have to be withdrawn. These factors suggest that the US economy will struggle to return to previous average growth rates, but equally the US economy appears to have successfully navigated the worst of the credit crisis and has avoided a double-dip recession.

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