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Antoine Gara

Assignment 5

The US Economy: Back on the Offensive after Fumbling the First Growth-Handoff

On February 26th 2010 the handoff play was going as called, fourth quarter 2009
GDP growth was revised upwards to 5.9% annualized; recovery had arrived. Business,
housing and inventory investments were growing rapidly, the DJIA rose steadily reaching
11,000 points in just over a month. We needed to complete the growth handoff from
stimulus and inventory restocking to business investment and personal consumption, but
fumbled. Personal consumption stagnated; businesses did not build inventory and imports
surged forcing us to defend against the threat of double-dip recession when second
quarter 2010 GDP came in at a paltry 1.7%.
Headwinds such as a de-leveraging consumer who is saving more and spending
less, a federal government that has completed its discretionary stimulus programs and a
surge in imports all exist as serious threats to economic growth. Nevertheless, I see 2.15
percent real GDP growth through the second quarter of 2011.
Continued strength in fixed domestic investment as it recovers from a low base,
increasing exports of finished goods at globally competitive trade-weighted prices and a
sharp reduction in net imports will offset stagnant personal consumption and drastic state
spending cuts. We have the ball back on offense and another handoff can work with
improved coordination.
In its October 2010 World Outlook, the IMF sees persistent weakness in personal
consumer expenditure through 2011 because falling housing prices and near double-digit
unemployment will deteriorate household net worth. According to Bloomberg, the
median forecast for consumer spending is a meager 1.2 percent growth through the
second quarter of 2011.
Bleak as its baseline is, the IMF sees potential for steeper real-estate prices-falls
and corresponding downside risk to household wealth. The Federal Reserve’s September
2010 Beige Book Report, adding to concerns over real-estate, notes a build in inventory
and a drop in sales and construction as a result of the expiration of the homebuyer tax
credit in April 2010. In the near-term, there isn’t space on the government balance sheet
to support distressed markets or contribute materially to GDP growth
According to Michael Gapen Senior US Economist at Barclays Capital,
government spending will provide little boost to the economy because census and
stimulus programs have faded as elements to GDP growth. Spending for the 2010 census
is registered in the 4.3 percent increase in second quarter government consumption
expenditure. He notes that; “replacing government spending is one of the key challenges
the economy faces” and that “demand has to ultimately pick up to replace it.”
Although consumer spending is slow, 6 percent private domestic investment
growth coming largely from equipment and software investment reveals increasing
demand in some GDP accounts. The Federal Reserve notes that as semiconductor and
other hi-tech businesses gain sales, demand holds at existing high levels. Hi-tech
manufacturing has also been running close to its trimmed capacity signaling the
possibility for future investment outlay.
Potential for higher than expected growth also comes from the balance of trade,
which as reported by the Bureau of Economic Analysis, dragged second quarter GDP
down by 3.37 percent as a result of a 32.40 percent annualized increase in imports. When
asked about the unexpected increase in imports, Chief Economist at IHS Global Insights
Nariman Behravesh wrote in email that the second quarter surge was a fluke, which will
not continue and could reverse in the third quarter. Going forward, IHS expects a small
positive contribution to GDP growth from net exports.
At Barclays Capital, Michael Gapen read the quarterly increase in imports as a
figure usually offset by personal consumption, production and a build in inventory. In a
slowing economy the surge in imports was anomaly that Barclays Capital explained as a
mismatch in timing caused by Chinese manufacturers rushing to capture an expiring
export tax rebate.
To secure the growth handoff in 2011, David Shulman Senior Economist at
UCLA Anderson Forecast believes we need to recognize that our fumble in 2010 was
feedback from policy uncertainty surrounding businesses. According to Professor
Shulman, gains from temporary stimulus measures for businesses and consumers were
subdued by low-visibility into future tax and healthcare expense. To fix the handoff, he
proposes that lowering the capital gains rate and increasing income tax on high-wage
earners can improve tax competitiveness, while maintaining fairness.
Without policymakers’ forward-looking and global understanding of corporate
operations, distorted business investment and hiring will persist, lowering potential US
economic growth. As such, I have a cautious outlook for GDP growth. Business will
sustain investment and the trade balance will benefit from a falling dollar; discretionary
government and consumer expenditure will be weak.

Q2 2011 / Q2
2010 2010 2010 2011.0
1 2 % Change Q2
Gross domestic product 13,138.8 13,194.9 2.152 13478.794
Personal consumption expenditures 9,225.4 9,275.7 1.012 9387.008
Goods 3,195.4 3,222.6
Durable goods 1,138.9 1,157.8
Nondurable goods 2,053.5 2,063.4
Services 6,029.6 6,053.4
Gross private domestic investment 1,690.2 1,791.5 3.265 1850.000
Fixed investment 1,630.5 1,702.5
Nonresidential 1,302.6 1,355.3 5.79 1433.80
Residential 330.7 350.1 -5.71 320.1
Change in private inventories 44.1 68.8
Farm 7.6 7.8
Nonfarm 36.5 61.0
Net exports of goods and services -338.4 -449.0 -37.235 -281.816
Exports 1,616.4 1,652.1 4.000 1718.184
Goods 1,128.0 1,159.2
Services 488.9 493.6
Imports 1,954.8 2,101.1 -5.583 1990.000
Goods 1,611.0 1,753.9
Services 344.6 348.3
Government consumption expenditure 2,540.2 2,564.9 -1.636 2523.602
Federal 1,048.4 1,071.5 3.075 1104.45
State and local 1,496.8 1,499.1 -5.633 1419.154