Greenlaw as Top Spending Forecaster Sees U.S. Consumer Pickup

American consumers will again be the drivers of the economic expansion in 2011 as employment picks up and wages grow, said David Greenlaw, Morgan Stanley’s chief fixed-income economist.

Purchases will climb 2.5 percent next year, up from the 2.3 percent Morgan Stanley’s New York-based economists projected last month and the 1.7 percent increase they forecast for 2010. The gains are short of the 3.5 percent average advance over the decade leading up to the recession that began in December 2007.

Consumers will be “a significant contributor to the growth outlook,” Greenlaw, the most accurate forecaster of household spending over the past two years according to data compiled by Bloomberg, said in an interview. More jobs “mean we will see incomes grow by about 2.5 percent. You’ll get gains very similar to that on the spending side.”

Greenlaw’s peers this month turned even more optimistic about the outlook for growth and consumer spending, which accounts for about 70 percent of the world’s largest economy. Purchases will grow 2.6 percent in 2011, according to the median estimate of 56 economists surveyed from Dec. 2 to Dec. 8.

Fed policy makers, who meet Dec. 14 in Washington, are likely to make no change to their $600 billion monetary stimulus, according to 38 of 39 analysts in a separate Bloomberg survey Dec. 7-8. Eight of 37 said the Fed would ultimately buy more than the $600 billion planned through June, and two said it would buy less.

‘Extended Period’

Respondents unanimously said the Fed would retain a sentence in its statement saying officials continue to “anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.”

Economists in the monthly survey projected gross domestic product will rise at a 2.5 percent annual rate in the final three months of this year, up from the median forecast of 2.2 percent in November. They raised the estimate for all of 2011 to 2.6 percent and to 3.2 percent for the following year.

“There’s no question the consumer is playing an increasingly larger role,” said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts, who also boosted his forecasts. “We’re seeing an improvement in the overall economic outlook.”

The improvements may come as a surprise after a Labor Department report last week showed payrolls rose by 39,000 workers in November, less than the most pessimistic forecast of economists surveyed by Bloomberg, and the jobless rate unexpectedly climbed to 9.8 percent, a seven-month high.

Payroll Gains

Nonetheless, as the attached chart shows, consumer spending typically accelerates before unemployment peaks in the aftermath of recessions. Greenlaw projects payroll gains to average 150,000 to 200,000 a month in 2011.

Rising optimism for 2011 also reflected growing exports and a diminishing drag from housing, in addition to continued gains in business investment that bolstered the recovery this year. President Barack Obama’s deal with Republican leaders to extend unemployment benefits and Bush-era tax cuts may further spur growth because it went beyond what some economists were expecting.

“It has helped reduce the uncertainty that had been a big negative all these months,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida. “It’s a pretty big deal relative to what would have happened without it. It prevents a collapse in growth.”

Global Outlook

Yields on Treasury securities surged since the agreement as the improving outlook for global growth sapped demand for assets considered safe. The yield on the benchmark 10-year note touched 3.33 percent yesterday in New York trading, the highest since June. The Standard & Poor’s 500 Index climbed to the highest level since the financial crisis intensified in September 2008.

Greenlaw’s forecasts have yet to take into account the tax deal, which he agreed will lift spending and growth even more. The changes may add as much as 1 percentage point to the 2.9 percent increase in GDP that Morgan Stanley has penciled in for next year, he said.

“A big chunk of the boost to growth would come from consumption,” said Greenlaw, who worked as an economist at the Federal Reserve in the early 1980s. “We would like to get a little bit more in terms of specifics on the legislation before we get too specific on the forecasts.”

Retail Sales

Morgan Stanley economists pore over the monthly retail sales figures, selecting categories like receipts at clothing, furniture and electronic stores that feed directly into the government’s GDP calculations, said Greenlaw. They then factor in missing elements, from auto-industry results to weather- related spending on utilities, to come up with their winning estimates, he said.

Retail sales rose the most in eight months in November and beat analysts’ estimates as consumers took advantage of discounts, particularly during the Thanksgiving weekend. Same-store sales at the more than 30 chains tracked by Retail Metrics Inc. jumped 5.3 percent, surpassing a prediction of 3.5 percent.

Neiman Marcus Group Inc., a luxury retailer, said the company has decreased promotions this holiday season and is delaying some markdowns as consumers are paying full price for its merchandise.

“The core customer is absolutely back shopping,” Karen Katz, chief executive officer, said on an earnings conference call yesterday. While shoppers’ spending is yet to return to pre-recession levels, she said, the Dallas-based retailer is benefiting from “good full-price selling.”

‘Strong Start’

Teen retailer Abercrombie & Fitch Co. reported a 22 percent increase in November sales at stores open at least a year, while J.C. Penney Co., the third-largest U.S. department store chain, said sales climbed 9.2 percent. The holiday season “has gotten off to a strong start,” Plano, Texas-based J.C. Penney said in a Dec. 2 statement.

Even with the economy on the mend, policy makers will have to contend with a labor market that’ll take time to heal, the survey showed. Economists project the jobless rate will end this year at 9.7 percent, and stay above 9 percent through 2011.

“High unemployment is going to be a hallmark of this recovery,” Behravesh said.



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