Top analyst picks 3.5pc growth for US in 2010

The US economy this 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 per cent in 2010, according to Maki, the chief US economist at Barclays Capital 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 would soon become confident the expansion would 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 per cent.

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

Maki 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 an interview.

The 67 per cent 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.

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

"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 [this] year - there's no parallel to that in modern US history."

Maki's forecast for 2010 is among the highest of the 58 economists in a Bloomberg News survey last month. He is more optimistic than Jan Hatzius, chief US economist at Goldman Sachs Group 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 per cent in 2010, and his 2.5 per cent first-quarter growth forecast is half the pace Maki anticipates.

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

Maki's projected 5 per cent 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 last year.

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

"Businesses over-reacted to the downside during the recession," said Maki. "As firms turn to expansion mode, rather than survival mode, they start raising employment and investment spending in a similar way."

A 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, a producer of circuit breakers and fuel pumps, and Craftsman brand tool-maker Danaher Corp, based in Washington - has outperformed the broader measure, rising 35 per cent, compared with a 25 per cent increase for the S&P 500.

Economic growth will push the yield on the 10-year Treasury note up to 4.5 per cent by year-end, Maki says, compared with a yield of 3.8 per cent just before Christmas.

Maki says central bankers will lift the US overnight bank lending rate target to 0.5 per cent in the third quarter, from zero to 0.25 per cent currently, and to 1 per cent 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.

Maki's top position in the Bloomberg ranking is based on estimates submitted in January for GDP. He forecast that month a 2 per cent expansion for the third quarter. The US economy expanded at a 2.2 per cent annual pace, according to a December 22 Commerce Department report.

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

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 per cent this year. John Lonski, 58, chief economist at Moody's Capital Markets Group in New York, was No 3. He sees a 2.7 per cent expansion.

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

The rate fell to 10 per cent in November from a 26-year high of 10.2 per cent the previous month, according to the Labour Department.

"The combination of exports, investment and consumption will be enough to give us, on paper at least, a decent-looking economy," said MacIntosh, who manages US$4 billion in municipal bonds for Eaton Vance.

He sees an "upward trend" in payrolls, with the first positive reading coming as early as this month.

The gains in hiring will lower unemployment "modestly", he said.

Hatzius and the economists at Goldman Sachs project the unemployment rate will average 10.3 per cent this year, compared with a median estimate of 10 per cent for 58 responses in last month's survey.

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

"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.

"The consumer cannot play that role" any longer.

- BLOOMBERG