Feb 2006 Financial News

Leading US economist gives projections for US economy

Feb 20, 2006

Contrary to the beliefs of many US based economic analysts and large-scale business publications, well-known economic analyst, Mr. Mitchell Held, holds the view that the US economy will see some balancing out for 2006.

In a recent lecture hosted by CFA Barbados, titled "The Global Economic Outlook", Mr. Held has estimated that within the current quarter of 2006, there will be 4.5 per cent of GDP growth in the US economy, while projections for the remainder of the year stand around 3.5 per cent GDP growth.

Mr. Held highlighted that these figures are in contrast to those of 2005, where rates were slightly above the 2006 projections, which was also 0.5 per cent below the GDP growth rate for 2004. He did explain that it would be fair to say that the US economy is slowing down to some degree, but he believes that the level at which it is slowing down and the reasons for this slow rate are more critical issues.

This renowned analyst has pointed to his belief that the defensive mechanism in US monetary policies will soon be removed given that the economy will become more stable in coming months. He contended that higher energy prices and a softer housing market would also limit growth, although income and employment gains should remain quite respectable.

Other US based economic analysts have pointed out that since US consumption is about 70 per cent of GDP, a consumption slowdown towards 2 to 2.5 per cent will imply a GDP growth slowdown towards 2 to 2.5 per cent. This occurs because other components of aggregate demand will not compensate for a consumption slowdown; US net exports will keep on worsening; and government consumption will only marginally increase.

These figures are below the projections provided by Mr. Held, who has a different take on consumer spending in the US. He posits, "Consumers have been up against a lot, but they continue to close their eyes and spend. The debt burden has not proven to be much of one, but that has been true for more than one generation." He has projected that higher short-term rates will only have a limited impact on consumer spending and will boost incomes at the margins. He added that lending markets in the US appear to be fairly liberalised, and this has in some measure assisted in consumer spending.

In terms of inflation, He explained that fears throughout last year in the US were high that this would rise, but he explained that the inflation rate has moderated recently. He issued warnings to the gathering that everyone should watch for a rise in labour costs in the US, stating the unemployment rate has recently fell below 5 per cent.

Labour costs estimates of the productive sector stand at 2/3's of the costs of production. He argued that wages will see some level of acceleration within the coming months. With respect to the expected performance of the US dollar in the global economy, He believes that the dollar will be subject to the vagaries of relative world-wide growth expectations and may resist the temptation to fall. He further explains that the US dollar seems set to continue its slow, but steady decline against most major currencies. The current exchange rate for US to Euro is US$1.18 to 1Euro; He believes that this rate will increase to US$1.38 to 1 Euro. In terms of short-term and long-term rates, He expects federal funds to peak at 4 3/4 per cent to 5 per cent while yields on ten-year Treasury notes will continue to benefit from relatively low inflation expectations. These ten-year yields in the 4 1/2 per cent area appear to attract consumers over a longer time.

Held provides an interesting analysis of the projected US economy performance and shows some important movements both in terms of employment rate and inflation.

He has however neglected the importance of the increasing US trade deficit and does not show the impact that such a tremendous deficit is likely to have on the economy. The US trade deficit has recently been reported to have soared to an all-time high of $US725.8 billion in 2005, pushed upward by record imports of oil, food, cars and other consumer goods. But not only has the deficit reached never before seen figures, the US is running an all-time high with many of its major trading partners, including Japan, Europe, OPEC, Canada, Mexico and South and Central America..


Stacia Browne
The Barbados Advocate
Friday, 17th February, 2006.
http://www.barbadosadvocate.com/NewViewNewsleft.cfm?Record=24525