Economic Bear Eats Crow

Aug. 22, 2005
New York-based financial firm Merrill Lynch & Co. is admitting it has consistently underestimated U.S. GDP growth for 2005. "The economy has clearly surprised us this year to the upside, and what thought would be a 3% GDP growth performance looks closer ...

New York-based financial firm Merrill Lynch & Co. is admitting it has consistently underestimated U.S. GDP growth for 2005. "The economy has clearly surprised us this year to the upside, and what thought would be a 3% GDP growth performance looks closer to 3.5% -- or perhaps even a tad stronger," confesses David A. Rosenberg, Merrill's North American economist.

The U.S. Commerce Department, in a preliminary estimate, figures the U.S. economy grew at an inflation-adjusted annual rate of 3.4 during the second quarter. During the first quarter if 2005, the U.S. economy grew at a real annual rate of 3.8%. "In terms of a winning streak, real GDP has now managed to grow at 3% SAAR [seasonally adjusted annual rate] for nine quarters in a row, and [the third quarter] will likely make it 10 straight," notes Rosenberg.

"What has surprised us has been the performance of the never-say-die American consumer," he says. Consumer spending, which accounts for about two-thirds of the U.S. economy, has been growing at about a 3.5% rate.

Specifically, says Merrill, it overestimated the personal savings rate in the wake of the presumably damping impact of a series of increases in the federal funds target rate by Chairman Alan Greenspan and his colleagues on the Federal Open Market Committee. "Instead of hitting 2% by mid-year as we had projected earlier in 2005, the savings rate is now at 0%," relates Rosenberg.

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