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Putting a rosier sheen on the U.S. economic outlook

A U.S. flag decorates a for-sale sign at a home in the Capitol Hill neighbourhood of Washington.


For those of you who collect economic forecasts, here's a new one worth putting up on the wall.

David Stockton, a former chief economist at the Federal Reserve and now a senior fellow at the Peterson Institute for International Economics, sees U.S. growth of 2.3 per cent this year, up from 1.7 per cent in 2012.

"It's like spring time in Bangor, Maine," rather than spring in Atlanta, Mr. Stockton said during a presentation in Washington Monday.

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As a native of northwestern New Brunswick, I can relate to what Mr. Stockton is saying. Some days are going to feel great; others are going to make the mild days feel like a tease. But spring is spring – summer is coming. Mr. Stockton said the risks to his outlook are "reasonably well balanced" for the first time in a long time. That's a shift from a long period of trepidation that things were more likely to get worse than better.

Mr. Stockton's relative optimism is rooted in the recovery of the housing market. He said he believes the rebound is real – and that it has a long way to run. He said it's reasonable to expect housing starts at a rate of about 1.6 million units a year, and builders currently only are barely touching an annual rate of about one million units.

To be sure, a growth rate of 2.3 per cent is not 3 per cent. Mr. Stockton says he's "not too jazzed" about hiring and factory production. He conceded that both have been stronger of late. But he points out that we've been here before. A bar chart of both the change in U.S. non-farm payrolls and industrial production resembles the random incline setting on a treadmill.

Therefore, Mr. Stockton is unwilling to predict a breakout in either this year. He thinks the unemployment rate still will be 7.6 per cent in 2013 and will average 7.1 per cent in 2014 and 6.4 per cent in 2015.

A lot of that is in line with the consensus. Where Mr. Stockton stands out from the pack is his outlook for Fed policy. There are a growing number of forecasters who are wavering on the Fed's commitment to keep the accelerator wide open. Mr. Stockton isn't among them. He thinks his former employer will leave its benchmark rate at zero until the end of 2015. He reckons the Fed's asset-purchase program – which policy makers have pledged to continue until they see evidence of a substantial change in the outlook for hiring – will remain at its current level until the middle of 2014.

Won't that risk inflation? Some say so; but again, Mr. Stockton is among that group. He doubts inflation will approach the Fed's 2-per-cent target before 2015. And he notes that inflation expectations have held fairly steady for more than a decade, despite stock market crashes, 9/11, and the Great Recession.

Spring time in Bangor can be unpleasant, but not as nasty of any of that. If inflation expectations remained moored through all the economic turbulence of the past decade, why would households and investors become less confident in the Fed's ability to hold the line when the horizon suggests calm?

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