Summer Newsletter Home

Economic Outlook

William B. Hummer, Chief Economist, Wayne Hummer Wealth Management April 22, 2010

Current public and private economic forecasts are signaling slow growth for the next 18 months. Expectations that real GDP will increase by 3% this year and next are consistent with projections that the consumer price index will rise about 2% per annum in the same time period.

Recoveries from past recessions have been driven by strength in consumer spending and housing. However, these catalysts are missing in the present cycle. This means the upturn should be modest and protracted, with unemployment likely to hover in the 9%-10% range through 2011.

This combination of slow growth and high unemployment has led the Fed to promise expansionary monetary policy for “an extended period.” Consequently, money rates and bond yields should be confined to a narrow range this summer.

Headwinds from expected increases in U.S. tax rates are a major reason for predictions of sluggish economic growth. The top U.S. marginal rate is scheduled to increase to 39.6% from 35% as the Bush tax cuts expire. The dividend rate will rise to the individual marginal rate and the capital gains rate will advance to 20% next year and to 23.8% in 2013 under terms of the recently enacted the health care reform law.

Since even these tax hikes will leave huge federal deficits in future “out” years, a European-style national sales tax known as “value added,” covering all phases of the production process, is being debated in Washington. Its introduction should be deferred at least until after the November elections. Current VAT taxes range from 17.5% in the U.K. to 19% in other major European countries.

The U.S. fiscal 2010 deficit is estimated at $1.56 trillion and the fiscal 2011 deficit is estimated at $1.27 trillion.