U.S. Markets Weekly – September 5 – September 9, 2011

Posted September 12, 2011 by CLeahey

[private][private]MARKET DATA AND THE OUTLOOK

The two main economic indicators released during this light data week, both outperformed expectations. First, the ISM Non-Manufacturing Index registered a small increase in August, defying expectations of a small decrease. Coupled with the Manufacturing Index that managed to stay above 50 last month, the message seems to be that the economy continues to expand, but at a depleted pace compared to the beginning of the year. Second, the trade gap narrowed more than expected in July thanks to a rebound in capital goods exports and modest growth in non-oil imports. Trade has been a pillar of economic strength for the U.S. recovery, but remains subject to the risk of a global slowdown centered on the Eurozone.

More attention, however, was on fiscal policy this week. President Obama unveiled a plan to spend another $450B to help shore up the recovery. The plan included $250B in payroll and job-related tax cuts for employees and employers, most of which will start in 2012. It also included roughly $200B in new spending on infrastructure projects and extended unemployment benefits. If $250B is spent in 2012 (representing 1.6% of forecasted GDP), then assuming a typical Keynesian multiplier, growth would be boosted by 2 percentage points above baseline. This would bring DE’s 2012 real GDP growth forecast to +4.5%, the kind of growth we’ve only dreamed of since the start of the recovery two years ago. This rate of growth would be much more conducive to job creation than what we’ve seen to date.

DE-USEW-9-9-11[/private][/private]