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Economy Lab

Deutsche Bank has a growth message Obama wants to see Add to ...

Deutsche Bank’s chief U.S. economist, Joseph LaVorgna should have no problem getting a meeting at the White House – his message is exactly what President Barack Obama wants to hear.

Mr. LaVorgna Tuesday raised his growth forecast a full percentage point, predicting the United States’ gross domestic product will expand 4.3 per cent between the fourth quarter of 2010 and the fourth quarter of 2011.

That’s the kind of growth that would significantly reduce the unemployment rate. Federal Reserve Chairman Ben Bernanke said last week that GDP must expand at an annual rate of about 2.5 per cent just to keep the unemployment rate constant as immigrants and graduates enter the labour force.

Deutsche Bank now estimates that the U.S. economy will grow at a pace of 4.5 per cent in the first quarter, 4.8 per cent in the second quarter, 3.5 per cent in the third quarter and 4.3 per cent in the fourth.

Mr. LaVornga’s revision is based on further reflection on Friday’s labour force survey. That report sowed much confusion, as analysts puzzled over what to make of historical revisions by the Labor Department and the impact of severe winter storms during the survey period. The payroll report showed a disappointing increase of merely 36,000 positions in January, but the household survey determined that the unemployment rate tumbled to 9 per cent from 9.4 per cent the previous month.

Deutsche’s U.S. economy shop has decided the January jobless report is good news. “We believe the labour market is finally gaining significant traction,” Mr. LaVorgna wrote in a note to clients.

He called the 0.8 percentage point drop in the unemployment rate over two months “rare” – the two-month decline was the largest since 1958-59, Mr. LaVorgna said. The unemployment rate also declined 0.8 percentage points in 1950-51 and 1954-55.

In all three of those instances, the unemployment rate dropped by an average of 1.3 percentage points over the next 12 months, Deutsche said. With that in mind, Mr. LaVorgna revised his unemployment rate forecast at yearend to 7.8 per cent from 8.8 per cent.

After coping for so long with the political fallout from an unemployment rate closer to 10 per cent, Mr. Obama surely would welcome a rate that would round off at 8 per cent. That’s still not great, but better than a double-digit rate – especially heading into an election year.

Last week, Matt McDonald, a partner at Washington-based consultancy Hamilton Place Strategies and a former White House official, calculated that since 1960, the unemployment rate was above 7 per cent during four election campaigns: 1976, 1980, 1984 and 1992.

In three of those elections, the incumbent lost. Ronald Reagan bucked the trend in 1984, when the unemployment rate was 7.2 per cent. However, the unemployment rate was falling over the year prior to the election – by 1.3 percentage points -- creating the impression among voters that the economy was improving.

Mr. McDonald predicts Mr. Obama will have to compete in the 2012 election with an unemployment rate higher than 7 per cent. But, “if the unemployment rate can break this 8 per cent level, President Obama can credibly argue that he is making progress on jobs, even though the unemployment rate will still be historically high,” Mr. McDonald said.

Follow on Twitter: @CarmichaelKevin


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