Brad Delong asks
Macro Advisors projects 3.1% real GDP growth over the next four quarters, then rising to 4.0% real GDP growth for the second half of 2012.
It could happen. But where is the demand supposed to come from?
I haven’t seen the internals of the Macro Advisors model but these numbers don’t sound off to me as a baseline. How would they come about.
1) Rapid increase in multi-family housing built to rent. If rents continue to rise then profits on new multifamily structure will be high. Tight credit for young borrowers combined with high gas prices will also push large rental complex demand.
Here I actually have some fear as to whether the North East corridor will be friendly enough to new development to allow this to proceed at its maximum pace. However, the sun-belt is still very open to bulldoze-and-build. Not to mention it is currently heavily car dependent, so I could see some rapid changes beginning to take place.
2) An end to fiscal contraction. The contraction in State and Local spending has been an intense blow to both employment and GDP. However, this should be coming to an end. I do not expect a government hiring boom anytime soon. However, we don’t need a boom. What we need is for State and Local to simply stop contracting.
3) Net Exports. This is a hard call with all that is going on in Europe but both inflation and growth in the developing world should be slowing US import growth and increasing US export growth.
4) Believe it or not, consumer spending. Consumer spending has not been a superstar but until the last quarter it was decent enough. Gas prices are the biggest variable here, but again I do not see the fundamentals supporting oil over $100 a barrel right now. I haven’t had a chance to read the latest thinking on the energy markets, but to me there looks to be too much supply in the wings to get oil this high.
Unlike 2008 there is much less incentive to “ground speculate.” That is slow pumping in the hopes that future prices will be ever higher. This is because we see a lot of potential energy supply coming online and we see a US market that seems to be moving rapidly towards conservation and is unexpectedly sensitive to price.
5) Continued heavy investment in Equipment and Software by businesses. The current strength in E&P is hard to explain and its easy to see it going away. However, if you just assume that something that we don’t fully understand is boosting investment and look at it from a business cycle perspective then a strengthening economy should lead to even more rapid E&P accumulation.
Now, of course predictions are hard – especially about the future. The wave of forecast downgrades may continue. However, gloom is not a model. You have to base your best guess on your best understanding of the underlying economy. To me that points to growth, even if we have seen a string of disappointments over the last nine months.