US economic outlook brightens as recovery takes hold – economist

28 March 2012 20:16  [Source: ICIS news]

HOUSTON (ICIS)--The outlook for the US economy has improved since the autumn, with unemployment falling gradually while inflation remains stable, an economist said on Wednesday.

"US growth is still sluggish, but it is starting to improve," said Nariman Behravesh, chief economist for IHS.

He made his comments during the World Petrochemical Conference, held by IHS Chemical.

The nation's economy should grow by 2-2.5% this year and 3-3.5% in the next couple of years, he said.

Inflation should be low in the US because the unemployment rate has remained relatively high ­– despite its recent declines, Behravesh said.

High unemployment rates discourage wage inflation, he said. Plus, the US still has excess production capacity.

"You will not get inflation in that type of environment," Behravesh said.

With inflation under control, the US central bank will be able to keep interest rates low, he said.

Although oil prices are high, they will unlikely cause consumers to change their spending habits, he said.

Fuel prices make up about 3% of the budget of a typical consumer, Behravesh said. "That's tiny. It doesn't have a big impact."

Plus, unemployment rates, while still high, are falling nonetheless. That, combined with low natural gas prices, should help offset rising oil prices, Behravesh said.

Meanwhile, the nation has two sources of pent-up demand that could fuel more growth.

For the past few years, the number of households created in the US has been about 400,000, well below the typical average of 1m-1.5m, he said. Ultimately, US household formation will have to catch up.

Also, US corporate cash flow in the US is strong and at record levels, he said.

As the nation's outlook improves, the threats to the US economy have declined, he said.

In the autumn, IHS predicted a 40% chance that the US would fall into a recession, Behravesh said. That risk has dropped to 20%.

"If you look at the data coming in, it is improving across the board," he said. "A lot of this suggests the momentum and sustainability of the economy is there."

One risk does remain, however. A fiscal crisis is forming, and the US has 3-5 years to address it, he said.

The nation, though, does have the tools to solve the problem, Behravesh said. The US will have to increase taxes both for its middle and upper classes while also cutting spending, particularly for its health programmes.

The World Petrochemical Conference lasts through Thursday.

By: Al Greenwood
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