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Pre-Christmas data bode well for U.S. economy

WASHINGTON - DECEMBER 23: Fred and Caroline Dutton of Silver Spring, MD, shop for gifts at Tugooh Toys in Georgetown on December 23, 2010 in Washington, DC.

Brendan Hoffman/Getty Images

The U.S. economy is picking up momentum.

New reports released Thursday showed American households increased their purchases for a fifth consecutive month in November, while companies recorded an increase in orders for capital goods such as computers and communications gear.

A closely watched gauge of consumer confidence rose last month and the number of Americans filing for jobless benefits declined by 3,000 last week, dropping the four-week moving average to the lowest since mid-2008, according to Deutsche Bank.

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The final batch of economic data before the Christmas holiday had economists revising higher the predictions for economic growth in the fourth quarter and next year. BMO Nesbitt Burns now predicts the world's largest economy will grow at an annual rate of 3 per cent over the final three months of 2010, a pace that should translate into enough jobs to pull lower the U.S.'s sky-high unemployment rate of 9.8 per cent.

Thursday's indicators add to evidence that the U.S. economy might finally be gaining traction after a summer and autumn dominated by worries over persistent joblessness, vitriol over the Federal Reserve's controversial plan to pump a further $600-billion (U.S.) into the economy and political uncertainty brought on by November's mid-term elections.

Earlier this month, President Barack Obama and congressional Republicans struck a surprise agreement to cut taxes and extend unemployment benefits that economists predict will provide significant economic stimulus next year. Other data suggest the economy already is gaining strength. Retail sales gained more than most Wall Street analysts were expecting in November, exports jumped to a two-year high in October and surveys this month show factory production is ramping up.

"Sentiment on U.S. growth is clearly improving and for good reasons," Jens Nordvig, head of G10 currency strategy at Nomura Securities in New York, said to his clients in his final note of 2010.

Faster growth in the U.S. is good news for Canada, which counts on its southern neighbour to buy about three-quarters of its exports. The International Monetary Fund said Wednesday that its forecast that Canada's GDP will expand 2.3 per cent in 2011 depends greatly on the U.S. economy getting on track. Statistics Canada said Thursday that Canada's GDP grew 0.2 per cent in October, less than the median estimate of 21 analysts surveyed by Bloomberg News. Stronger output by oil producers and miners outweighed weaker factory production and a drop in residential construction, Statscan said.

The most recent U.S. data isn't universally positive. The housing market, the trigger for the worst recession since the Great Depression, is stuck at the bottom of the crater created by its collapse. New-home sales rose 5.5 per cent to a rate that would result in 290,000 over a year, less than the Wall Street consensus forecast and slower than September's annual sales pace of 305,000. The November figure is 79 per cent slower than the record 1.4 million reached in 2005 and only 6 per cent faster than the all-time low of August, according to BMO analyst Jennifer Lee.

Also, the renewed enthusiasm over the U.S. economy has an end date. The higher growth forecasts are mostly the result of Mr. Obama's tax compromise, which could add as much as 1 percentage point to GDP in 2011 at the cost of adding nearly $1-trillion to the country's already massive deficit.

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Many analysts predict the U.S. economy will slow again in 2012, weighed down by high unemployment and an oppressive debt that will either force governments to curb spending or lead to higher interest rates as bond traders demand higher yields to buy Treasuries. Newport Beach, Calif.-based PIMCO, which manages the world's largest bond fund, revised its 2011 forecast for U.S. economic growth to between 3 and 3.5 per cent from between 2 and 2.5 per cent, but says the economy will struggle to reach 3 per cent for several years starting in 2012.

"It is important to stress that we see a one-year cyclical bounce in U.S. economic growth as a result of these monetary and fiscal policy measures, but also, that structural issues remain unaddressed, including the persistence and nature of elevated unemployment and extremely high public and private debt levels," Saumil Parikh, a managing director at PIMCO, said in comments posted on the firm's website Thursday.

"This forecast upgrade is a case of kicking the can down the road. We are once again borrowing from the future to enhance growth today."

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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