Head of US Market Strategy David Kelly is bullish on the US economy for 2011.
It must be recognized that the economy is moving from recovery to expansion and barring any additional shocks to the system, “4 percent growth is very doable this year.” That’s the conclusion of David Kelly, the head of the US Market Strategy team at JP Morgan, who made his case in a webinar recently.
Dr. Kelly holds this view based on a number of variables, the first being business capital expenditures, which have improved significantly since the trough of the recession but is only just back to the average of the past 15 years. Treasurers might agree here, as technology spend is expected to increase this year. Further, Dr. Kelly said, vehicle sales, also showing a strong comeback from the recessionary trough with a seasonally adjusted annual sales rate of 12.2 million units (as of Nov. 2010), are still well below the average number of 14.6 million units. Housing starts too, while very sluggish due to the excess capacity from foreclosures and years of overbuilding, likely can only go up from here. Finally, his view on consumer finances is cautious in that they continue to be conservative with a 2010 YTD savings rate of 5.7 percent, just shy of 2009 and well above the average since 1998, which has generally been less than 4 percent.
Despite evidence that consumer dollars are working to improve their balance sheets rather than fueling the economy with expenditures, Dr. Kelly takes the optimistic view that “we’re still in the doldrums but it won’t take much to get some confidence to spur growth.” Interestingly, he cites the recent tax bill as “very expansionary” and also believes the US needs government deficit spending to grow the economy, which he said will help achieve the hoped for 4 percent growth. But it’s a doubled-edged sword, with debt eventually having to be dealt with. “Congress really needs a long-term plan to bring down the deficit” he stated.
Numerous risks
Despite the upbeat nature of his outlook, Dr. Kelly said there remained many risks to the economy, listing the usual suspects of European sovereign debt, as well as Japan and its ability to manage its debt levels and also oil prices, which have been steadily creeping up in recent months. A return to $4 per gallon gas prices will have a significantly negative impact to the economy, he said. Finally continued high unemployment, which will drive foreclosures, depress real estate prices and tighten consumer spending, remains a major concern.
Clearly there is much on which to base an optimistic view for 2011, but also much about which to be concerned. Cautiously optimistic is probably the best forecast we can hope for.