Friday, October 27, 2006

Significant Slowdown in U.S. Growth

Just as I predicted two weeks ago, U.S. GDP growth in the third quarter slowed down to less than 2% but more than 1.5%, or 1.6% to be more precise. It was perhaps a bit on the low side of my range, but within it nevertheless.This was of course only the "advance" number. There will be a lot of revisions of that number. In my experience though, advance numbers are mostly correct. While they are usually upwardly revised in the preliminary and the "final" estimate, they are usually downwardly revised in the annual revision a few years later. So it is reasonable to assume this will indeed be the final number-or more correctly, that the final number is about as likely to be lower as higher.

Nouriel Roubini thinks the number is going to decelerate further in Q4, to less than 1%. While I basically share his bearish outlook on the U.S. economy, I find it less likely that it will be really that low in Q4. I am hesitant about making precise forecasts with so little data available, but the falling oil prices will probably boost consumer purchasing power enough to keep it above 1%. However, it will probably be closer to 1% than the 3.5% Morgan Stanley is forecasting.

And the boost from falling oil prices will be a one-time event, whereas problems coming from the imbalances created by Alan Greenspan will continue to pull down the U.S. economy-and do so with increasing intensity. The imbalances created by Greenspan have not disappearing or even been reduced, they have in fact been aggravated. Meaning that Roubini might very well be right in forecasting a recession by Q1 or Q2 2007.


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