Deutsche Bank Chief U.S Economist Joseph LaVorgna cut his U.S. growth forecasts by half a percentage point today as government spending continues to depress economic growth.
LaVorgna now projects the U.S. economy will increase some 2.4 per cent in 2012, down from 2.9 per cent.
“The catalyst for the current quarter reduction stems from the lack of any defence spending snapback that we had assumed,” LaVorgna said. “Recall that all of the unexpected weakness in Q1 real GDP was in government, specifically defence, which fell at an 8.3% annualized rate.”
Below, military spending over the past decade.
Photo: Deutsche Bank
However, sharply declining energy prices and relatively stable hiring plans have propped up consumer spending, he says.
CPI readings have shown falling inflation rates, down from a high of 3.9 per cent in September to 2.3 per cent this April.
“To be sure, this energy-induced fillip to consumers does not pose a long-term solution if income growth continues to languish over a longer period, but it does provide a significant offset in the short term,” LaVorgna said.