It's all Bush's fault

http://www.breitbart.com/news/2007/01/14/070114230239.dh0wbbv7.html

[rquoter] Economists are hastily upgrading their forecasts for the US economy after a series of surprisingly strong reports suggesting the so-called "soft landing" may be over and growth is accelerating.

Over the past week, surprises have come in stronger-than-expected reports on US job creation, the trade balance and retail sales -- all key contributors to economic activity.

Lehman Brothers chief US economist Ethan Harris on Friday boosted his forecast for fourth quarter 2006 growth to an annualized rate of 3.3 percent, a leap from the firm's prior call for just 2.0 percent growth.

"After slowing in November, the economy seems to have regained its stride," Harris said.

"With the last of the major data in, we are now revising fourth quarter GDP to an above-trend 3.3 percent. A wide range of indicators have been stronger than expected. Most important have been the strong consumption data and the surprising improvement in the trade balance."

The latest data defy predictions that the slump in real estate would filter into other areas of the economy, notably consumer spending.

The latest data showed US employers added a healthy 167,000 new jobs in December, with unemployment holding at a low 4.5 percent. Average wages were up 4.2 percent annually.

A separate report Friday showed US retail sales increased 0.9 percent in December.

Retail sales are closely watched as consumer spending accounts for about two-thirds of US economic activity. Some analysts have theorized that slumping housing prices may crimp spending in a reversal of the so-called wealth effect.

The higher retail sales "will juice up overall real growth in the fourth quarter to about 3.0 percent -- a substantial improvement from only 2.0 percent in the third quarter" said Brian Bethune at research firm Global Insight.

Even the US trade deficit, long a source of weakness, improved in the latest report to 58.2 billion dollars in November, as exports increased.

The data have eased pressure on the dollar and lifted the stock market to fresh highs.

The downside of the data is that it means the Federal Reserve is unlikely to cut interest rates soon. And some say the Fed, which has been warning about inflation, could maintain its bias toward rate hikes or even increase rates at some point in 2007.

But some analysts say the strong data may be distorted by mild weather and drops in energy costs.

"Some of this strength, however, should prove illusory," said Wachovia Securities economists in a research note.

"Housing and motor vehicle production are still major drags on output, with residential construction expected to slice another percentage point off fourth quarter growth and declines in motor vehicle output slicing off another percentage point."

Wachovia expects GDP growth "to slow to around a two percent pace in 2007 and look for a string of seven consecutive quarters of GDP growth below three percent," the report said.

"Most of this slowing reflects the unraveling of the housing boom, which we believe still has a way to go. Consumer spending will also pack less punch but will post modest gains."

Wachovia said whether the slowdown is enough to allow the Federal Reserve to cut interest rates in 2007 "has become an open question."

"The expansion looks far less precarious than it did even a few weeks ago," the economists said. "Provided economic conditions do not take a decided turn for the worse, a Fed ease will likely require a substantial lessoning of inflationary concerns."

Harris at Lehman Brothers said "a natural question is whether the solid fourth-quarter growth is a fluke."

He said data could be distorted by things such as the introduction of the new Windows Vista operating system, shifts in holiday shopping patterns, problems in the auto sector, the plunge in energy prices and unusually warm winter weather.

"However, looking closely at these factors on net they argue for more, not less strength in the first quarter of 2007," he said. [/rquoter]