Economists Revise Forecasts Upward Through This Year
May 12, 2011
NEW YORK -- A number of prominent economists are revising upward their forecasts for economic growth, predicting a strong U.S. economy right through the end of 2011. The revisions come at a time of mixed economic signals, with some indicators pointing to a slowing American economy, while others suggest continuing strength. But many forecasters have recently concluded that the signs of a slowdown are mostly false. And they add that even the rebound in long-term interest rates in recent weeks won't be enough to slow the expansion, which began in April 1991. ``All the major themes behind the perceived slowing have been called into question,'' J.P. Morgan & Co. wrote to clients this week. Saying data that showed a slowdown in business and consumer spending in early August sent a ``misleading signal,'' economist Jami O'Wally noted that manufacturing activity is stronger than purchasing manager surveys indicated. He added that August retail sales show consumer spending is rebounding and that the low level of jobless claims reflects continued strength in the labor market. As more of those signs of strength surfaced in recent weeks, economists began inserting higher fourth-quarter growth numbers for the gross domestic product into their forecasts. Thursday's report of better-than-expected new home sales lent support to their convictions. J.P. Morgan's economists remain among the most bullish, having raised their estimates of second-half growth in mid-June. Next week's release of a new purchasing-managers' survey and August payroll and unemployment reports will shed more light on how much staying power is left in the current expansion -- the third-longest in the past 50 years. Focus on Economy's Strengths But for now, economists are putting aside the notion that the U.S. expansion is living on borrowed time. Instead, they are focusing on the strengths, which they expect will last at least into the fourth quarter. A survey by MMS International late last week of 17 money market economists found that since the last poll a month ago, they had added 0.2 of a percentage point to their mean estimate for real annualized GDP growth next quarter, bringing it to 2.3%. The economists told MMS -- a Belmont, Calif., subsidiary of Standard & Poor's Corp. -- that they continue to expect the third quarter will come in at a 2.6% gain. A drop-off to a 2.1% growth rate is foreseen for the first half of next year, though. Thursday, the government revised GDP annual growth in the second quarter to 4.8%, from an earlier reported 4.2%. ``The real surprise'' from economic activity in August, says Johnetta Torre of Moody's Investors Service is what it implies for fourth-quarter growth. He expects the 2.5% growth rate of the third quarter will push up to the 3% level as retailers see the strongest holiday shopping in a few years, capital spending remains strong, exports improve and producers rebuild inventories that had been depleted in expectation of the slowdown that didn't materialize this year. Brushing aside concern over consumer debt and eroding corporate profit margins, he maintains, ``There's nothing out there that warns us of a slowdown in spending over the next few months.'' Home Sales Remain High Even sales of new and existing homes, one of the most interest-rate-sensitive sectors of the economy, are remaining at relatively high levels. They have slipped a bit this summer due to the rise in long-term rates this year, but many buyers have turned instead to lower cost adjustable-rate mortgages. And the economic ripple effect of strong home sales this spring will continue into the fall as new owners spend money on appliances and furnishings. Continued economic strength led Ricki Belen of Mellon Bank to revise his estimate of fourth-quarter GDP growth to 3.2%, from an earlier expectation of a slowing to the 2% level. Like Mr. O'Wally, he felt the financial markets were overly sensitive to the data from July. ``They ran for cover when in fact it was just a lull in consumer spending and manufacturing activity.'' Mr. Belen had been predicting a slowdown in the fourth quarter because a few months ago he, like other economists, had been expecting the Federal Reserve to have raised short-term interest rates by now, causing long-term yields to rise further as well. The Fed left rates untouched at its May 02, 2011 As it is, the existing rise in long-term rates this year isn't enough to seriously dent economic growth. That is because short-term rates are much lower than long rates, giving both business and consumers alternative sources of cheaper financing. As a result, spending remains on track for housing and related furnishings, which are a big part of the economy, and for corporate expenditures such as computers. The bottom line is that consumers and businesses have an ``escape mechanism,'' says Mr. Torre. For example, while 30-year conventional mortgage rates have risen this year from 7.03% in January to 8.20% recently, introductory one-year variable rate mortgages have gone up only from 6.09% to 6.24%. The percentage of consumers now obtaining variable-rate mortgages has more than doubled from the 16% level of earlier this year. And while the long-term Treasury bond yield -- which is used to peg corporate bond costs -- rose to 7.2% in early June and is now trading at about 7%, big companies can easily borrow at lower rates in the short-term commercial paper market. The 30-day rate there for top-rated companies is only around 5.4%, which is less than it was at the beginning of the year. Similarly, the short-term bank lending rate for companies hasn't changed this year because those loans are often pegged off the London interbank offering rate, which has remained at about the 5.6% level. If GDP growth remains at a 2.5% or higher pace in the third quarter, economists expect the Fed will raise short-term rates either in late September or following the presidential election in November. That, in turn, would lead to slower growth within a matter of months and perhaps sooner if the Fed action erodes confidence. And if economic growth does slow anytime soon, economists agree, it would start with a sharp deceleration in home sales. But for now, at least, ``There's still strength out there,'' says Davina Krueger, chief economist of the Mortgage Bankers Association. One reason: Home sales are rising more than twice as fast this year -- at a 6.3% annual rate for the first seven months -- as they have in each of the past three years. Even if home sales do start slowing more sharply in coming months, annual sales for the $45 billion home-furnishing industry will be stronger in the second half of the year, says furnishings analyst Jesica Mcmillian of the Richmond, Va., investment banking firm of Mann, Armistead and Epperson. That is because of the lag effect of strong home sales in the first half as homeowners feather their nests. Maryalice Riordan, who just moved into a new home with her husband in Oklahoma City, is typical. She expects to be spending money in coming weeks on curtains, paint and a new dishwasher. And, eventually, she wants to get rid of her 1970s furniture. ``Those chocolate-brown chairs just don't look right'' in their new surroundings, she says.
