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The U.S. economy is ‘sputtering not stalling’ according to Goldman Sachs analyst Andrew Tilton.With first half GDP growth rate at about 2% everyone is talking about the economy drifting around ‘stall speed’ but Tilton believes that, “The recent disappointment in first-half growth is not yet long enough or deep enough to tilt the balance of risks towards recession, in our view.”
Tilton gives us a breakdown:
- Part of the weakness can be blamed on higher oil prices and the impact of the Japanese disaster on the auto industry. Each is expected to be worth 0.5 on second-quarter growth. With gasoline prices easing, and the auto industry producing again, growth is likely to move back to about 3% in the third quarter.
- Economies tend to recover after two quarters of below-2% GDP growth. Its typically after a year of 2% growth that recession becomes more likely.
- A healthy labour market is essential to boost consumer spending. Household spending accounts for 70% of GDP, and labour compensation, including benefits, account for 2/3 of household income. Because labour productivity however is constantly increasing, GDP growth needs to be well over 2% to strengthen the labour market. It explains why stall speed is set at around 2%.
- A 0.3% increase in the three-month moving average of the U.S. unemployment rate is needed to reflect recession and the current increase is well below that figure. Only a sustained increase in unemployment will make it breach the 0.3% threshold and this is unlikely.
- The biggest downside risk is the impact of the Eurozone debt crisis on the economy.
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