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2012: A New Cycle Begins
.. Revising Growth Up, Unemployment Down
The surge in payrolls in January provides further evidence that a virtuous cycle of
economic activity is beginning to take hold. We have increased our outlook for Q1
2012 real GDP growth to 2.3% from 1.5%. This is a function of increased
consumer spending emanating from pent-up demand and a better labor market and
credit conditions. It also reflects expectations that Federal government spending
will rebound after plunging in Q4 2011. Risks remain: Europe has not been
“solved”. Faster growth and the recent rapid decline in labor force participation
have caused us to also revise down our estimate for the unemployment rate by
year-end: we now expect a 7.9% rate versus our previous estimate of 8.6%.
.. The past week
The fundamentals for sustained US growth remain in place, with healthy
employment and ISM reports the latest evidence. Consumer indicators were
generally favorable, as auto sales surged and chain store sales growth accelerated.
The Fed’s Senior Loan Officer Survey indicated little change in lending standards
but somewhat stronger loan demand. The tone of Chairman Bernanke’s testimony
before Congress was similar to his post-FOMC press conference. Interestingly,
missing in his remarks was any clear indication that further easing is forthcoming.
.. The week ahead
Other than the usual weekly data, the main reports of note will be at the end of the
week, when foreign trade and University of Michigan sentiment are released. The
trade deficit probably narrowed a bit in December after surging in November. We
expect the University of Michigan measure to retrace some of the January gain.
The next key date is Feb. 7, when Fed Chairman Bernanke is scheduled to speak
before the Senate Banking Committee on the economic outlook and budget