What If Everything Goes Right For Once?

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by: Cullen Roche

I was reading the latest note from Jan Hatzius at Goldman, who is very bullish about the future of the economy (past 2013) and started wondering – what if everything goes right from here? What if Europe is bottoming, China is bottoming, US real estate starts to rip again and the US economy starts to pick-up momentum? What if the Balance Sheet Recession is completely over, we’re not Japan and the private sector starts to ramp up big time? What if all the “glass half empty” perspectives end up converting to “glass half full” perspectives?

Now, that’s not my view. I generally think we’re muddling through and likely closer to the next recession (though not yet) than the next boom, but it’s a scenario that very few people are likely considering….What if the economy just starts to take off from here?

Anyhow, here’s the Hatzius thoughts (via Zero Hedge):

“5. Federal spending cuts and the lagged effects of earlier tax increases will continue to weigh on growth in the second half of 2013. That is why we expect real GDP growth to accelerate only gradually from 1.7% in Q2 to 2½% in Q4. But under our baseline assumption of an increase in the federal debt ceiling that involves no fresh spending cuts beyond those already in the legislative baseline, the fiscal drag is likely to abate sharply thereafter. This is the key reason why we continue to forecast a pickup in real GDP growth to 3%+ in 2014.

6. Barring renewed adverse shocks, we expect this pickup to set the stage for a lengthy period of above-trend growth. This is partly because we lean towards the optimistic end of the spectrum with regard to the US economy’s supply-side potential. Admittedly, labor productivity growth has disappointed in recent years, with an average gain of just 1.4% (annualized) since the start of the recovery. But as Kris Dawsey noted in Friday’s US Economics Analyst, the reason seems to lie mostly in cyclical capital spending weakness. Total factor productivity—the component of GDP growth that cannot be explained by changes in capital or labor inputs—has remained quite healthy, averaging 1% over the past four years. As capital spending rebounds, labor productivity growth should rebound as well. “