Why Morgan Stanley Just Slashed Its Second-Half GDP Outlook

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Photo: luckypines, Flickr

From Morgan Stanley’s David Greenlaw:There is nothing good to say about the June employment report.  Payrolls barely rose and, unlike
last month, the accompanying figures on hours and earnings were also quite weak.  Moreover, the
household data showed another uptick in the unemployment rate, which was attributable to a very
sharp drop in that survey’s measure of employment.

We still believe that a number of temporary factors point to a pickup in GDP growth during the second
half of 2011, and this will buy some time.  But the extent of that improvement now seems likely to be somewhat less than previously thought, given the fading support for income and production evident in the jobs figures. Thus, we have marked down our GDP estimates for the second half of 2011 and now look for growth to average  3.5% (versus nearly +4.0% last month).

Finally, the June employment results will turn up the heat for legislative action on an extension (and
expansion) of the payroll tax cut.  Also, momentum may start to build for other measures aimed at boosting employment — such as a targeted foreign earnings repatriation program and a new jobs tax credit.

3.5% growth still seem pretty high to you?

You can see why Greenlaw’s still bullish here.


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