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Scribd Assignment 5

Scribd Assignment 5

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Published by Antoine Gara

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Published by: Antoine Gara on Nov 01, 2010
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Antoine GaraAssignment 5The US Economy: Back on the Offensive after Fumbling the First Growth-Handoff 
On February 26
2010 the handoff play was going as called, fourth quarter 2009GDP growth was revised upwards to 5.9% annualized; recovery had arrived. Business,housing and inventory investments were growing rapidly, the DJIA rose steadily reaching11,000 points in just over a month. We needed to complete the growth handoff fromstimulus and inventory restocking to business investment and personal consumption, butfumbled. Personal consumption stagnated; businesses did not build inventory and importssurged forcing us to defend against the threat of double-dip recession when secondquarter 2010 GDP came in at a paltry 1.7%.Headwinds such as a de-leveraging consumer who is saving more and spendingless, a federal government that has completed its discretionary stimulus programs and asurge 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 asharp reduction in net imports will offset stagnant personal consumption and drastic statespending cuts. We have the ball back on offense and another handoff can work withimproved coordination.In its October 2010
World Outlook 
, the IMF sees persistent weakness in personalconsumer expenditure through 2011 because falling housing prices and near double-digitunemployment will deteriorate household net worth. According to Bloomberg, themedian forecast for consumer spending is a meager 1.2 percent growth through thesecond quarter of 2011.Bleak as its baseline is, the IMF sees potential for steeper real-estate prices-fallsand 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 inventoryand a drop in sales and construction as a result of the expiration of the homebuyer taxcredit 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 growthAccording to Michael Gapen Senior US Economist at Barclays Capital,government spending will provide little boost to the economy because census andstimulus programs have faded as elements to GDP growth. Spending for the 2010 censusis registered in the 4.3 percent increase in second quarter government consumptionexpenditure. He notes that; “replacing government spending is one of the key challengesthe economy faces” and that “demand has to ultimately pick up to replace it.”Although consumer spending is slow, 6 percent private domestic investmentgrowth coming largely from equipment and software investment reveals increasingdemand in some GDP accounts. The Federal Reserve notes that as semiconductor andother hi-tech businesses gain sales, demand holds at existing high levels. Hi-techmanufacturing 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 GDPdown by 3.37 percent as a result of a 32.40 percent annualized increase in imports. Whenasked 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 willnot 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 afigure usually offset by personal consumption, production and a build in inventory. In aslowing economy the surge in imports was anomaly that Barclays Capital explained as amismatch in timing caused by Chinese manufacturers rushing to capture an expiringexport tax rebate.To secure the growth handoff in 2011, David Shulman Senior Economist atUCLA Anderson Forecast believes we need to recognize that our fumble in 2010 wasfeedback from policy uncertainty surrounding businesses. According to Professor Shulman, gains from temporary stimulus measures for businesses and consumers weresubdued 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

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