Deutsche Bank’s Joe LaVorgna has upped his GDP forecast to 4.5% for 2011.
After factoring in the weather, which wreaked havoc on the January employment report—depressing both employment and hours—we believe the labour market is finally gaining significant traction. This is apparent from the rare 0.8% decline in the unemployment rate over the past two months, the largest back to back drop since 1958-59. The rate also declined 0.8% in 1950-51 and in 1954-55. In all three of these instances, the unemployment rate was lower over the next 12 months on average by 1.3%. In light of this new information, we are lowering our yearend unemployment rate forecast to 7.8%, down from our previous forecast of 8.8%. Importantly, the drop in the rate confirms our view that growth is significantly above trend this quarter.
Based on the mix in Q4 2010 real GDP, which showed 7.1% growth in final sales but only a $7B increase in inventory building, we should see significantly more inventory accumulation this quarter, enough to propel output up to +4.5% (see chart in attachment). The combination of strengthening demand and negligible inventory levels means that the restocking of goods should proceed at a faster pace this year relative to what we initially expected. Certainly, this is what the January ISM survey appears to be telling us—the headline figure posted its highest reading in since May 2004. All of the subcomponents increased, and new orders, the most forward-looking component, made a new cyclical high. In fact, this new information points to strengthening capex relative to our baseline expectation, which we had worried was too low because we had not fully accounted for the increase in accelerated depreciation in our previous forecast: Companies can now expense 100% of their capex this year and 50% next year, which could lift 2011 real GDP $60 to $70 billion.
In light of the strength in the factory sector and what it implies for both inventory building and capex, we are marking up our full year 2011 real GDP forecast as measured on a Q4 over Q4 basis by one full percentage point to 4.3%. We hinted at this potential change two weeks ago in our US Economics Weekly, but warned that we would need to see stronger employment data before moving in that direction. The employment news, in particular the drop in the unemployment rate, was sufficiently upbeat in our view to make this forecast update. The right hand-side column contains our new forecast relative to our previous baseline. –JL