President Obama unveiled a $447 billion fiscal stimulus plan Thursday evening. The plan features a variety of spending and tax cut initiatives focused on job creation. Even with a rapid and intact passage of the proposed legislation by Congress, it could still take a few months to see measurable benefit in terms of job creation. Also, some benefits represent extensions of existing programs now set to expire, such as the payroll tax cut and the accelerated business depreciation, and so do not represent additional stimulus relative to the status quo. Given the nature of the plan and the likely timing, there is little upside potential to the current third quarter as a result of the President’s proposal. However, a combined one-two punch of fiscal stimulus plus monetary stimulus from the Federal Reserve (expected on September 21) would lift economic growth in 2011Q4 and beyond. The immediate impacts would likely be seen in the areas of business, consumer and investor confidence, even before we would see measurable job creation. Another fall/winter stock market rally, accompanied by rebounding confidence, and resulting in a positive wealth effect, does increase upside risk to our baseline economic forecast of weak-to-moderate economic expansion for 2012. Two keys: what happens in Congress and what happens at the Fed.
The U.S. international trade gap narrowed by more than expected in July to -$44.8 billion after widening to a post-recession maximum of -$51.6 billion in June. The better-than-expected trade numbers for July will provide some lift for Q3 GDP, suggesting that the balance of risk to our forecast of 1.7 percent real GDP growth for Q3 is now to the upside. The July trade gap narrowed as total imports declined slightly by $0.5 billion while exports rebalanced, increasing by $6.2 billion for the month. If the trend toward moderating imports continues, this could mitigate some of the potential boost to Q3 GDP by resulting in slower inventory accumulation. Given the recent perturbations to global trade balances due to the Japan earthquake and to oil price fluctuations, the July trade gap improvement does not necessarily suggest that a sustained improvement to net exports is set in train. The historical pattern is for a widening U.S. trade gap during expansions as consumers demand more oil and imported goods. The picture for U.S. labor market conditions did not get any clearer with this week’s unemployment insurance claims report. For the week ending September 3, initial claims increased by 2,000 to hit 414,000, amounting to little more than noise coming at a time when the data is being buffeted by hurricanes, floods and summer-end effects. The August Beige Book indicated modest growth in some Federal Reserve districts, including the Dallas District, with notes of mixed or weakening activity in other districts. Chicago reported a slower expansion. Richmond and Philadelphia reported weaker activity. Most districts reported slower manufacturing activity. Hurricane Irene caused retail sales disruptions across the Northeast.