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Investing Specialists

Rebooting My Economic Forecast

While near-term growth may be weaker, there is no reason to give up on the U.S. economy, says Morningstar's Bob Johnson.

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The economic data this week are best characterized as mixed, and the S&P index reacted accordingly, falling 0.7% for the week. There's no denying that there was a lot of bad news this week, including poor initial unemployment claims data, housing data that continued to bump along the bottom, and some worrying signs out of a slowing manufacturing sector. But there was good news, too. Industrial production jumped over a percent, corporate spending and merger activity continued to accelerate, and banks appear to be slowly opening their purse strings according to a recent Federal Reserve report. Low rates and increased mortgage refinancings should also bode well for consumers. However, the positive data were largely ignored.

Based on the last couple of months of data, I have little choice but to reduce my GDP growth estimates for 2010 to the 2.5%-3% range from as high as 4.0%-4.5% as recently as March of 2010. I have been very bullish on the economy since the spring of 2009--a bit too bullish over the past six months. I am still bullish on the United States and world economies, but the short-term picture remains cloudy. With autos and housing operating so far below what I believe is the replacement/population growth demand level (autos at close to 12 million units versus a more typical 15 million-17 million units and housing starts at the half-million level versus Morningstar's natural demand forecast of 1.5 million units per year), it is shocking to me that we've gotten this far in the recovery without better news from these all-important sectors.

So Where Did I Blow It?
There is no one answer about how I missed, but miss I did. Perhaps my biggest error was underestimating the leakage in consumer spending to overseas economies (although exports did help jump-start the U.S. economy early on--live by the sword, die by the sword).

Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.