Economy

Economy Poised for Surge, Says 'Most Accurate' Forecaster


By Timothy R. Homan and Bob Willis

(Bloomberg) — The U.S. economy next year will turn in its best performance since 2004 as spending perks up and companies increase investment and hiring, says Dean Maki, the most-accurate forecaster in a Bloomberg News survey.

The world's largest economy will expand 3.5 percent in 2010, according to Maki, the chief U.S. economist at Barclays Capital Inc. in New York. The rebound in stocks and rising incomes will prompt Americans to do what they do best—consume, said Maki, a former economist at the Federal Reserve. Faced with dwindling inventories and growing demand, companies will soon become confident the expansion will be sustained, he said.

Household spending "will pick up steam as we move into the second half of 2010," said Maki, 44, who topped all 60 forecasters in the Bloomberg News ranking of gross domestic product projections for the first three quarters of 2009. "The overall picture for 2010 will be an economy growing rapidly enough to bring down the unemployment rate" to an average of 9.6 percent. The rate will reach about 9 percent by the end of 2010, he said today in a Bloomberg Television interview.

Maki, who specialized in researching household finances at the Fed from 1995 to 2000, said the economic recovery this time will be similar to past rebounds. Consumer purchases improved after last year's 61 percent plunge in gasoline prices and will keep growing in 2010, reflecting the surge in stocks. Faster growth will push Treasury yields higher and help the dollar strengthen as the Fed raises interest rates, he predicts.

Consumer BehaviorMaki holds a doctorate in economics from Stanford University near Palo Alto, California. His dissertation addressed Americans' response to the phasing out of tax deductions for interest on consumer loans. He received a bachelor's degree in economics from St. Olaf College in Northfield, Minnesota, and joined the investment banking unit of London-based Barclays in 2005.

"One area that we put more weight on perhaps than others is the stock market," he said in a telephone interview last week. The 67 percent gain in the Standard & Poor's 500 Index since a 12-year low on March 9 has helped shore up family balance sheets, putting Americans in a better position to spend. "That's going to help consumer spending as we move through 2010," he said today in a separate interview with Bloomberg Television.

The prospects for a stronger rebound are consistent with recoveries from past recessions, he said.

No Parallel"We don't believe this time is different from all other business cycles," said Maki. "The consensus view that growth will stay subdued all through next year—there's no parallel to that in modern U.S. history."

Maki's forecast for 2010 is among the highest of the 58 economists in a Bloomberg News survey this month. He is more optimistic than Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. (GS) in New York, who was No. 1 among forecasters of GDP during the 12 months through June 2009. Hatzius, 41, estimates the economy will expand 2.4 percent in 2010, and his 2.5 percent first-quarter growth forecast is half the pace Maki anticipates.

Ed McKelvey, who works with Hatzius, said the Goldman team forecasts "subpar growth" next year because "employers will be reluctant to hire" and households will exhibit "a bias toward higher saving." Budget difficulties at state and local governments and credit constraints will also restrain the economy, he said.

First-Quarter GrowthMaki's projected 5 percent rate of expansion in the first quarter, the fastest since the same three months in 2006, will reflect the need for companies to replenish inventories cut at a record pace in the first nine months of this year.

"The kick to the economy as production simply catches up to sales is going to be extremely large, and we think that will be spread out" into early next year, Maki said today in the Bloomberg Television interview.

Ramped-up production to increase stockpiles and investment in equipment will propel the expansion early in the year, leading to employment gains that will bolster spending in the second half, he said.

"Businesses overreacted to the downside during the recession," said Maki, who says he tries to keep fit by playing tennis and jogging with his dogs. "As firms turn to expansion mode rather than survival mode, they start raising both employment and investment spending in a similar way."

Industrial SharesA rebound in corporate spending may be one reason investors have been eager to snap up shares of industrial equipment makers. The Standard & Poor's 500 Industrial Machinery Index, which includes Cleveland-based Eaton Corp., (ETN) a producer of circuit breakers and fuel pumps, and Craftsman brand tool-maker Danaher Corp. (DHR), based in Washington, has outperformed the broader measure, rising 35 percent so far this year, compared with a 25 percent increase for the S&P 500.

Economic growth will push the yield on the 10-year Treasury note up to 4.5 percent by year-end, Maki said, compared with a yield of 3.8 percent at the end of last week.

Maki says central bankers will lift the U.S. overnight bank lending rate target to 0.5 percent in the third quarter, from zero to 0.25 percent currently, and to 1 percent by year-end. His colleague at Barclays, David Woo, global head of foreign-exchange strategy, predicts the dollar will end 2010 around $1.40 per euro.

Top SpotMaki's top position in the Bloomberg ranking is based on estimates submitted in January for GDP. He forecast that month a 2 percent expansion for the third quarter. The U.S. economy expanded at a 2.2 percent annual pace, according to a Dec. 22 Commerce Department report.

He also predicted a 4.5 percent contraction for the first quarter of 2009, followed by a 1 percent decline in the period from April through June. The Commerce Department later reported contractions of 6.4 percent and 0.7 percent.

Neal Soss, 60, chief economist at Credit Suisse in New York, was the second most-accurate forecaster of GDP over the first three quarters of 2009. He projects the economy will grow 3.3 percent next year. John Lonski, 58, chief economist at Moody's Capital Markets Group in New York, was No. 3. He sees a 2.7 percent expansion.

Robert MacIntosh, chief economist at Boston-based Eaton Vance Management, was the most pessimistic forecaster on employment this year—and the most accurate. He expected unemployment to reach 10 percent in the fourth quarter and average 9 percent this year.

26-Year HighThe rate fell to 10 percent in November from a 26-year high of 10.2 percent the previous month, according to the Labor Department.

MacIntosh, 52, agrees with Maki that the economy will rebound in 2010, forecasting growth of 3.5 percent, and that the jobless rate will average 9.5 percent.

"The combination of exports, investment and consumption will be enough to give us, on paper at least, a decent-looking economy," said MacIntosh, a graduate of Harvard University in Cambridge, Massachusetts, with an MBA from Dartmouth College in Hanover, New Hampshire. He manages $4 billion in municipal bonds for Eaton Vance.

He sees an "upward trend" in payrolls, with the first positive reading coming as early as January. The gains in hiring will lower unemployment "modestly," he said.

Pick RisingHatzius and the economists at Goldman Sachs project the unemployment rate will average 10.3 percent next year, compared with a median estimate of 10 percent for 58 responses in this month's survey.

Bart van Ark, chief economist at the Conference Board, a New York-based research firm, forecasts a 10.4 percent average unemployment rate next year that he said will restrain household purchases.

Van Ark, the best forecaster of consumer spending for the period from January through September, said he sees household purchases rising 1 percent in 2010 after falling 0.6 percent this year. Maki forecasts a 2.1 percent gain in 2010.

"Even though we do see a pickup in recent quarters, it's not a signal that the consumer is going to lead us out of the recession into solid growth territory," said van Ark, a 49-year-old Dutch native. "The consumer cannot play that role" any longer.


Bloomberg Rankings

=================== GROSS DOMESTIC PRODUCT ==================
(All estimates from survey in January)
---------------------------------------------------------------
1Q 1Q 2Q 2Q 3Q 3Q
Economist/Firm Est. Actual Est. Actual Est. Actual
---------------------------------------------------------------
Dean Maki -4.5 -6.4 -1.0 -0.7 2.0 2.2
Barclays Capital
Neal Soss -4.5 -6.4 -1.0 -0.7 1.8 2.2
Credit Suisse
John Lonski -3.7 -6.4 -1.2 -0.7 2.4 2.2
Moody's Capital
---------------------------------------------------------------
---------------------------------------------------------------

====================== UNEMPLOYMENT RATE ====================
(All estimates from survey in January)
---------------------------------------------------------------
1Q Actual 2Q Actual 3Q Actual
Economist/Firm Est. End 1Q Est. End 2Q Est. End 3Q
---------------------------------------------------------------
Robert MacIntosh 8.0 8.5 9.0 9.5 9.5 9.8
Eaton Vance
Richard Berner 8.0 8.5 8.8 9.5 9.2 9.8
Morgan Stanley
Joshua Shapiro 7.8 8.5 8.5 9.5 9.0 9.8
MFR Inc.
---------------------------------------------------------------
---------------------------------------------------------------

====================== CONSUMER SPENDING ====================
(All estimates from survey in January)
---------------------------------------------------------------
1Q 1Q 2Q 2Q 3Q 3Q
Economist/Firm Est. Actual Est. Actual Est. Actual
---------------------------------------------------------------
Bart van Ark -1.4 0.6 -0.6 -0.9 1.7 2.8
Conference Board
Peter Kretzmer -1.2 0.6 -0.7 -0.9 1.3 2.8
Banc of America
John Dunham 0.0 0.6 0.5 -0.9 1.2 2.8
Guerilla Economics
---------------------------------------------------------------
---------------------------------------------------------------




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