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business newsPotential for Big Upside Economic Surprises for USA in 2011
By
James Kostohryz
Jan 03, 2011 9:20 am
In light of new data, economists have been furiously revising their GDP growth forecasts upward. But their predictions are still too tepid. Here's why.
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Such forecasts are far too tepid, in my view. My own base case scenario is for US GDP growth of 4.75% in 2011 with most risks skewed to the upside. GDP growth above 5.75% is a real possibility.
The Key Factors for US Upside GDP Growth Surprise
1. GDP run rate is clearly accelerating past 3.0%. The run rate for GDP growth in the fourth quarter of 2010 is well above 3.0%, and is clearly accelerating, according to virtually every available concurrent or advance measure of economic activity.
2. Tax compromise will boost growth significantly. I think most people have not yet understood how stimulative the tax compromise will be to US GDP growth in 2011. First of all, the 2% cut in payroll taxes will provide a very significant boost to consumption. Second, the extension of unemployment benefits will not really be a marginal boost to growth, but it certainly eliminates a major looming risk to the recovery. Third, nobody really knows what effect raising the top marginal rates would have had on growth, and at least this source of uncertainty has been eliminated.
Most importantly, the tax provisions allowing full or partial expensing of capital expenditures in 2011 could provide a huge boost to investment spending by businesses. After the crisis of 2008-2009, US firms have been extremely reticent to upgrade or purchase new equipment. As a result, there is significant pent-up demand. The “bonus depreciation” rules will cause many business managers to pull the trigger on investment projects. Furthermore, corporate cash levels are at all-time highs and access to credit has become normalized thereby facilitating such investments.
Overall, I believe that the tax compromise bill -- particularly the payroll tax cut and the “bonus depreciation” provisions -- will boost 2011 GDP growth by at least 1.0% above its current run rate. Indeed, the overall boost could actually exceed 1.5%.By the way, I am not saying that the tax compromise is or is not good long-term policy; I am merely saying that it will jazz growth in 2011.
3. Consumption is set to accelerate sharply. For all the endless talk about the overleveraged US consumer, the fact of the matter is that this was always somewhat of a myth. About 30% of Americans have no debt whatsoever and another 45% have debt burdens that are well within reasonable levels. Twenty-five percent of Americans have some sort of debt problem, but the decrease in consumption due to strains within this cohort has already been fully absorbed by the economy and this is no longer acting as a drag on growth statistics. To the contrary, the 25% that have been in trouble have been busy restructuring the past couple of years, and spending from this segment is actually set to begin to grow modestly from depressed levels.
Even the non-segmented statistics show that Americans have deleveraged very substantially in the past two years. As can be seen below, their financial obligations as a percentage of personal disposable income have fallen very sharply and are now at levels that are below the historical average since 1980.
This and other data show that that Americans have the means to spend at rates that are in line with trends of the past few decades. But, will they? I certainly believe that they will in 2011. American consumers have been postponing expenditures for over two years now, which means that there is significant pent-up demand. The implication is that as soon as consumers feel that the economic recovery is solid and that their jobs are relatively secure, they are going to make significant expenditures. This is going to impact consumption numbers in a big way.
Those that doubt that this could occur should take a look at the gangbusters 2010 holiday shopping season data. This is just a preview of what could be coming in 2011 as consumers shed some of their inhibitions. Remember, the 2010 holiday spending occurred in the context of a relatively anemic economic recovery and relatively high levels of perceived job insecurity. As explained below, growth in 2011 will be much more vigorous and the employment situation will improve substantially, thereby greatly increasing not only overall incomes but the propensity to spend as consumers gain confidence in their economic security.
I expect accelerated consumption to boost GDP by around 1% from the current run rate in 2011.
No positions in stocks mentioned.
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