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Sunday, February 10, 2013

Wells Fargo Monthly Economic Outlook

Trend economic growth, low inflation and steady Fed policy provide the framework for our economic outlook. For the first half of this year, our outlook is for trend growth of 2.0 percent with contributions from consumer spending, business investment in both equipment & software and structures, and net exports as well as residential investment. Detracting from growth will be government spending and inventories. Current strength in consumer spending for the first quarter will likely slow as tax increases reduce disposable income. Equipment & software and structures should add to growth in the first half of this year, but at a slower pace than last year, as fiscal restraint hits contract spending and taxes rise. Residential investment will provide some offset to slower domestic demand elsewhere as housing affordability, demographics and the lure of low interest rates relative to home price appreciation support further recovery in the housing sector.
Inflation remains a back-burner issue for the economy and the Federal Reserve. The personal consumption deflator and the consumer price index measures of inflation remain below any threat point for the Fed. Corporate profit growth continues to slow as is typical at this stage of business expansion as unit labor costs rise, while top-line revenue gains remain steady. The outlook for growth and inflation supports the case for the Fed to remain on autopilot, with its open-ended Treasury and MBS bond buying program for the foreseeable future–given the expectation of 7 percent plus unemployment rates for both 2013 and the greater part of next year as well.

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