I have updated my economic forecast, and it looks a little better than it did a few months ago. I have upgraded the first three quarters of 2011. The later quarters have about the same growth rates as before -- they were already fairly good growth rates back in my November 2010 forecast.
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The reason for the forecast revision is that recent data show the processes I had anticipated occuring faster than I had previously thought they would.
The keys to my vision of the economic outlook are:
- The economy wants to recover. Economic activity is the norm. People want to consume, and are willing to work in order to do so.
- The Fed's quantitative easing will work, though with a significant time lag. That's why my forecast has the greatest growth rates at the end of 2011 and early 2011 -- about one year after QE2 got started.
- The world economy is showing good growth in Asia, which helps us. I worry about a European credit crisis triggering a Continental recession, which would probably pull us into another recession. That's not my base forecast, but a contingency that business leaders should consider.
- Consumers are slowly opening their wallets. Remember, there is tremendous diversity among people. Some have been heavily damaged by the recession, and I'm not counting on them spending much money. Plenty of others, however, have maintained their incomes. They had cut back spending due to fear, but will gradually relax and shop.
- Businesses have opportunities to use capital investments to lower operating costs, which will spur capital spending.
Sound rosy to you? Here's another way of looking at it. I compare my forecast GDP with the Congressional Budget Office's estimate of potential GDP. Look at how long the gap persists:
Because of that persistent underachievement, I don't think inflation will rise significantly in the next few years. The rise of oil and food prices are changes in relative prices, which will not translate into permanent changes in the overall inflation rate.
In this context, the Fed will keep short-term interest rates low. However, global economic improvement will increase the demand for credit, pulling long-term interest rates higher.
This is a broad-brushed summary. I produce more detailed forecasts that concentrate on specific industries as my clients require.