Economists Group Boosts Growth Expectations for 2010
May 24, 2010
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National Association for Business Economics panelists expect economic growth in 2010 and expect performance to exceed its long-term trend in 2010 and 2011.

"Although risks involving Europe have recently escalated, the outlook in this country has improved in most respects,” said NABE President Lynn Reaser, chief economist at Point Loma Nazarene University. "Growth prospects are stronger, unemployment and inflation are lower, and worries relating to consumer retrenchment and domestic financial headwinds have diminished. The economy is in reasonably good shape as the recovery approaches its first anniversary, but forecasters remain ‘extremely’ concerned about large federal deficits going forward.”

The NABE forecast panel boosted its expectations for growth in 2010 to 3.2% for real GDP, up from 3.1% in its February forecast. The panel also predicts a 3.2% pace of real GDP growth in 2011. This points to a sustained, two-year stretch in excess of the economy’s potential - or “trend" - rate of growth. The panel estimates the economy’s potential rate of growth at 2.8% over the next five years.

NABE panelists date the expansion as nearly one year old, with the trough of the previous recession in June of 2009.

Many NABE forecasters believe that traditional cyclical forces of pent-up demand and inventory building are becoming more important. Although financial headwinds will temper the pace of growth, concerns about credit conditions have eased somewhat compared to the February survey. Inflationary pressures are expected to gradually build, but a “stagflation” scenario—a combination of slow growth and high inflation—is considered highly unlikely.

The biggest boost to the outlook comes from households, as forecasters have marked up their outlook for spending. Real consumer spending is still expected to lag behind the overall economy but should see sizable growth. Part of this mark-up reflects reduced expectations of thrift.

Other points from the survey results:

Job growth is now seen to be on a steady footing and are expected to remain robust throughout the forecast horizon. The jobless rate is forecast to steadily decline to 9.4% by year- end 2010 and 8.5% by year-end 2011, though it remains high by historical standards and is ranked by panelists as their second greatest “concern.”

Additionally, NABE panelists increased their estimate of the unemployment rate consistent with full employment to 5.5% from 5.0% previously.

Setbacks to the housing recovery in early 2010 surprised most forecasters, and the strength of the rebound has also been downgraded. Still, residential investment and housing starts are forecast to continue to rise throughout the forecast horizon.

Business investment will be an engine of growth driving the economic recovery. The massive inventory liquidation of 2008-2009 is over, with restocking slated for the next two years. Business spending on equipment and software will be strong, likely buoyed by a combination of higher operating rates and rising corporate profits.

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