The National Outlook

Highlights

• The performances of the U.S. economy and its housing sector during the first half of 2010 were weaker than expected and we’ve trimmed the outlook for the balance of the 2010-2011 forecast period. We’re projecting a systematic recovery without fallback into a double-dip recession. However, growth of output (real GDP), the pace of recovery in the labor market and inflation rates have been lowered. Our revised baseline (most probable) forecasts are subject to unusually large degrees of uncertainty, with risks tilted to the downside.

• The European Sovereign Debt Crisis (ESDC) was a major unanticipated shock to the global economy and the international financial system, and it’s full effects during the second half of this year and in 2011 are unclear. For now, it’s clear the ESDC is weakening exports to and stimulating imports from the Eurozone. Furthermore, the possibility of defaults on the debts of Greece, Portugal, Spain, Ireland or Italy has resurrected extreme risk aversion in credit markets. These “contagion” effects inhibit lending by banks to consumers and small businesses, and currently pose large risks to the near-term economic outlook in the U.S.

• The Commerce Department revised the estimate of first-quarter growth of real GDP downward to 2.7% from 3.2%. The revision was concentrated in real final sales of domestic product, reducing annualized growth there to 0.8%, and indicating overall GDP growth was more dependent on the inventory cycle, which contributed 1.9 of the 2.7 percentage points to growth. Large negative contributions were recorded for residential and nonresidential structures, state and local governments, and net exports.

• Monthly indicators show the recovery of the U.S. economy lost momentum in the second quarter of this year. We’ve lowered our forecast of real GDP growth one percentage point to 2.2%. The key factor is an unexpected surge in imports. We expect imports to weaken, as the dollar loses some strength, although we’ve trimmed GDP growth slightly for the remainder of the forecast period. Even so, we’re expecting systematic expansion of demand and our forecast shows modestly above-trend GDP growth as well as systematic improvements in the labor market.

• Labor market recovery has lagged output recovery. The growth of real GDP since mid-2009 has been due to strong growth in labor productivity. Payroll employment declined through the end of 2009 while the unemployment rate climbed to its cyclical high. Private-sector employment has been rising only slowly since then, lowering the unemployment rate to 9.5% in June from 10.1% in October. Weekly data on initial claims for unemployment insurance have been hovering around 450 thousand through mid-July.

• Total payroll employment numbers have gyrated in recent months by hiring and subsequent dismissal of temporary federal census workers. This will extend into the third quarter. However, we expect total employment to show systematic improvement over the balance of the 2010-2011 forecast period. We expect the civilian unemployment rate to drift downward reaching 8.7% by the final quarter of 2011.

• Next month’s issue will present our first cut at the outlook for 2012.

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