Cheerful holiday forecast for the U.S. economy

UBS has issued a strong outlook for the U.S. economy, citing strong durable goods orders, growing income and an excellent spending forecast.

While durable goods orders were weaker in November due to a drop in aircraft orders, a rebound is expected. Increases in income and consumption are also forecasted for November in light of the fact that real consumer spending has been rising at about a 3.5% annual rate thus far in Q4.

In addition, core personal consumption spending was unchanged in November, and little change in the University of Michigan consumer sentiment index was seen in December. Judging from the strength in mortgage applications, new and existing home sales saw a rise in November as well.

Overall, third quarter real GDP growth will likely be revised up to a 3.0% annual rate from 2.5%, mostly due to additional strength in inventory investment. With the payroll tax cut, extension of unemployment benefits, and faster expensing of capital expenditures in the new tax bill, UBS raised its forecasts for 2011 GDP to 3.3%, up from 2.7%. A small amount of 2011 activity will be pulled forward from 2012, which UBS revised to 2.6% growth from 2.8%. Faster growth is expected for Q4 of 2010.

Further growth in 2011 will be led by the consumer sector. The tax cuts and unemployment benefits are expected to boost income and spending, and the real consumer spending growth estimate has been bumped to 4.2% from 3.1%. In addition, the real disposable income forecast has moved up to 3.6% from 2.3%. UBS maintains an optimistic outlook for the household sector as well, based on a combination of continued labor market improvement, the new tax cut and transfer payments, and their assessment of households’ savings behavior.

With continuing improvement in household balance sheets and with low interest rates reducing the incentive to save, further increases in the saving rate are not foreseen, with a decline to 5.2% projected for 2011 from 5.8% in 2010. However, the saving rate forecast is higher than it would have been absent the new tax legislation: Fed researchers estimated that the marginal propensity to consume from the 2008 tax rebate was about 33%.

On the whole, GDP growth is boosted slightly more as increased spending filters through into the broader economy. Faster 2011 real GDP growth will feed through into faster hiring, with payroll gains of about 180,000 per month on average. However, with the unemployment rate higher at the end of 2010 than we had anticipated, our end of year forecasts for 2011 and 2012 are unchanged at 9.0% and 8.8%, respectively.

Staff

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