James Pethokoukis

Politics and policy from inside Washington

The U.S. economy in the second half … and beyond

August 19, 2009

ISH Global Insight is looking for a U-shaped recovery: 2 percent growth in 3Q, 2.4 percent in 4Q and then 1.8 percent next year. This would be typical following a banking crisis/recession.  I think this will make for a very unhappy electorate.

The main driver of growth in the second half of the year remains the turn in the inventory cycle. Firms will at first cut their inventories less rapidly, and then by the fourth quarter begin to add to them. The success of the “Cash for Clunkers” program is accentuating the cycle in the autos sector, as the surge in demand is depleting supplies of popular vehicles and manufacturers are raising their production plans in response. There is some growth payback in the first half of 2010, since we think that some of the Cash for Clunkers demand is pulling sales forward. In addition, compared with our July forecast, the turn in residential investment, business equipment spending, and exports begins earlier, helping the third and fourth quarters. But the forecast profile remains a U-shaped one, since it takes a long time (not until 2011 and 2012) to move into higher gear.

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