U.S. GDP Growth: The Bulls and Bears Can’t Both Be Right

U.S. GDP Growth

Source: U.S. Bureau of Economic Analysis

U.S. gross domestic product could grow just 1.7 percent in 2013, according to a downwardly-revised forecast from the International Monetary Fund. According to a draft of the IMF’s World Economic Outlook obtained by Bloomberg, the fund reduced its U.S. GDP forecast from 2 percent growth because of the fiscal tightening (sequestration) that began last month.

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This angle — that sequestration cuts and tense fiscal negotiations in Washington will drag on 2013 economic growth — has been championed by economic bears ever since it became clear that the U.S. would be unable to avoid some sort of spending correction. Economists at Goldman Sachs forecast that sequestration cuts — $85 billion this year — will shave 0.75 percentage points off second- and third-quarter GDP growth.

But the bears are just one half of the equation, and a recent series of positive economic indicators suggests that the IMF forecast of 1.7 percent GDP growth is overly pessimistic…

To take a hatchet to the argument: if the U.S. was able to grow GDP by about 2 percent in the three years since the recession ended — while housing was contracting, local and state governments were slashing spending, and unemployment was much higher — then it should be able to increase growth as conditions continue to improve.

So while bears grumble that the expiration of the payroll tax holiday and continued volatility in some key indicators will continue to weigh on growth, more bullish economists highlight a sustained pickup in housing and business investment that likely fueled an economic expansion in the first quarter of 2013.

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“What happened at the beginning of the year was a genuine surprise in terms of how well the economy held up,” said Bruce Kasman, chief economist at JPMorgan (NYSE:JPM), according to Bloomberg. Kasman recently raised his forecast for first-quarter U.S. GDP growth from 1 percent to 3.3 percent. An economist at Morgan Stanley also increased his estimate from 0.8 percent to 3 percent.

The median forecast of 69 economists surveyed by Bloomberg suggests that the first-quarter GDP probably grew at an annualized rate of 3 percent.

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