Top U.S. GDP Forecaster Herrmann Sees Consumer Spending Boosting Recovery
The world’s largest economy will expand in 2011 at the fastest pace in six years as American consumers boost spending, said John Herrmann, a senior fixed- income strategist at State Street Global Markets LLC.
Herrmann, whose forecasts for gross domestic product were the most accurate over the past year according to data compiled by Bloomberg News, estimates the amount of all goods and services produced will grow 3 percent this year, the most since 2005. He said household purchases will also climb 3 percent after rising 1.8 percent in 2010, the first gain in three years.
Herrmann is among the economists surveyed by Bloomberg this month who raised growth and spending estimates after President Barack Obama signed into law an $858 billion bill on Dec. 17 extending Bush-era tax cuts for two years. The measure also renewed emergency jobless benefits for the long-term unemployed and cut 2011 payroll taxes by two percentage points.
“The tax-relief program is going to be a big support for growth,” Herrmann, who last month projected the economy would grow 2.9 percent this year, said in an interview. “A lot of the recovery has been driven by policy support,” he said, including efforts by the Federal Reserve to keep borrowing costs low.
Herrmann’s peers made even bigger adjustments to growth and spending forecasts this month on the heels of the tax compromise cobbled together by Obama and congressional Republicans. The economy will grow 3.1 percent in 2011, up from December’s estimate of 2.6 percent, according to the median of 71 economists surveyed by Bloomberg from Jan. 3 to Jan. 11.
Consumer spending, which accounts for about 70 percent of the economy, will grow 3 percent this year, according to the median estimate of 63 economists surveyed, up from last months’ projected 2.6 percent.
“The consumer is responsible for a bigger share of the recovery than before,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York, who boosted his forecast for household purchases in 2011 to 3.1 percent from 2.9 percent.
The tax cuts combined with gains in employment will spur shoppers, said Maki. “Consumer spending is picking up in response to better income growth.”
Retailer stocks are climbing as spending improves. The Standard & Poor’s Supercomposite Retailing Index has gained about 31 percent since June 30, 2010, compared with a 25 percent advance for the broader S&P 500.
Holiday, Car Sales
Shares of Sears Holdings Corp., the largest U.S. department-store chain, and Tiffany & Co., the New York-based jeweler, both climbed this week after announcing profit forecasts that exceed analysts’ expectations.
An increase in holiday sales and growing auto demand showed consumer spending picked up late last year, indicating the economy was strengthening even before the new legislation kicked in. Vehicle purchases climbed last month to the highest level in two years.
Ford Motor Co., the second-largest U.S. automaker, is among companies planning to boost employment as demand improves. The Dearborn, Michigan-based company this week said it plans to hire more than 7,000 workers in the next two years, including engineers with expertise in battery-powered cars.
“There are literally 10 more jobs for every Ford job throughout the U.S.” because the industry is so integrated, Alan Mulally, Ford’s chief executive officer, said in a Jan. 10 Bloomberg Television in interview. “Based on the strength of our products and the fact that the economy is recovering, it is very positive for all of us.”
Ford isn’t the only American company hiring thousands of new workers. Dollar General Corp., the biggest of the U.S. dollar discount stores, said Jan. 3 it plans to add 6,000 jobs as it opens 625 more stores in fiscal 2011.
Consumer spending climbed at a 3.9 percent annual rate from October through December, the most in four years, according to this month’s survey median. The gain helped GDP rise at a 3.2 percent pace, economists said.
Bigger job gains may be needed to maintain consumer spending, which has increased for five months through November. A Labor Department report last week showed payrolls rose by 103,000 workers in December, less than the 150,000 gain projected by economists surveyed by Bloomberg.
Economists project the jobless rate will end 2011 at 9 percent and average 8.6 percent the following year.
“We’re going to get enough job growth where unemployment starts to come down, but pretty gradually,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida. “Unemployment at 9 percent by the end of the year is nothing to write home about. We really need to see it falling much more sharply, but I don’t think that growth will be strong enough to support that.”
At the pace of economic expansion projected by central-bank officials, “it could take four to five more years for the job market to normalize fully,” Bernanke said Jan. 7 in testimony to the Senate Budget Committee.
Bernanke last week also reiterated that the central bank will proceed with a plan to buy $600 billion of Treasuries through June in an effort to trim joblessness and avert deflation, or an extended drop in prices.
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