WASHINGTON (MNI) – The following are highlights from the May 2010
Industry Survey released Monday by the National Association for Business
Economics. It notes the forecast panel’s outlook for economic growth in
2010 improved, boosting their real GDP forecast from 3.1% in February to
3.2%:

— The NABE forecast panel has boosted its expectations for growth
in 2010 to 3.2 percent for real GDP from 3.1 percent in its February
forecast. The panel is also predicting a 3.2 percent pace of real GDP
growth for 2011, meaning a sustained two-year stretch in excess of the
economy’s potential or trend rate of growth. The panel estimates the
economys potential rate of growth at 2.8 percent over the next
five-year period. NABE panelists date the expansion as nearly one year
old, with the trough of the previous recession in June of 2009.

— Many of the forecasters believe that the traditional cyclical
forces of pent-up demand and inventory building are becoming more
important. Although financial headwinds will temper the pace of growth,
concerns about credit conditions have eased somewhat compared to
Februarys survey. Inflationary pressures are expected to gradually
build, but a “stagflation” scenario’s combination of slow growth and
high inflation is considered highly unlikely.

— The biggest boost to the outlook comes from households, as
forecasters have marked up their outlook for spending. Real consumer
spending is still expected to lag behind the overall economy but should
see sizable growth. Part of this mark-up reflects reduced expectations
of thrift. The saving rate for 2010 is currently expected to average a
modest 3.4 percent — down from the 4.6 percent rate predicted just
three months ago.

— Job growth is now on a steady footing. Except for a third-quarter
slowdown related to a reversal of Censusrelated hiring, job gains are
expected to remain robust throughout the forecast horizon, as output
gains remain steady but productivity gains progressively slow. The
jobless rate is forecast to steadily decline to 9.4 percent by yearend
2010 and 8.5 percent by year-end 2011, though it remains high by
historical standards and is ranked by panelists as their second greatest
“concern.” Additionally, NABE panelists increased their estimate of the
unemployment rate consistent with full employment to 5.5 percent from
5.0 percent previously.

— Setbacks to the housing recovery early this year surprised most
forecasters, and the strength of the rebound has also been downgraded.
Previous NABE surveys showed expectations that housing would be a growth
sectorexceeding the pace of the economy overall. In the current survey,
it is expected to play more of a supporting role in 2010. Nonetheless,
residential investment and housing starts are forecast to continue to
rise throughout the forecast horizon. Last years lows in home sales and
home prices will not be retested, according to 65 percent of survey
respondents, and the rebound is intact.

— Business investment will be an engine of growth driving the
economic recovery. First, the massive inventory liquidation of 2008-2009
is over, with restocking slated for the next two years. Second, business
spending on equipment and software will be strong, likely buoyed by a
combination of higher operating rates and rising corporate profits.
Business spending on structures, however, will continue to decline,
albeit at a slower pace than during the free-fall of 2009.

— Smaller businesses should see some easing of credit conditions
going forward, according to three-quarters of survey respondents.
One-quarter expect no change, but none expect credit availability to
deteriorate.

— Corporate profits will post a solid 20 percent gain in 2010 with
an additional 7 percent rise in 2011, slightly better than usual for
this stage of an economic recovery. Despite the stock market rally over
the past year, NABE panelists still remain optimistic. While opinions
differ on the magnitude of the stock market rebound, all but one
forecaster expect an increase in 2010. All expect further gains in 2011.

— The dollar will retain much of its recent gains vis-a-vis both
the euro and a trade-weighted basket of foreign currencies. With respect
to the risk of a Greek default, views are mixed. Fifty-one percent
believe that a default will not occur, though some debt restructuring
will be required. Twelve percent expect outright default within the next
twelve months and 37 percent expect default after some short-term
maneuvering only buys time. (It should be noted that these responses
were collected prior to the May 9 announcement by the EU, IMF, and ECB
of the program to address the European financial crisis.) As for China,
forecasters assigned a 30 percent probability to it presently
experiencing a “bubble,” though there was a wide dispersion on this. The
top quartile assigned a 60 percent probability of a bubble, while the
bottom quartile assigned only a 20 percent probability.

— Foreign trade will grow rapidly, due to strong economic growth
worldwide and easier financing conditions. The trade deficit is expected
to widen slightly in both nominal and real terms. Relative to real GDP,
the trade deficit will remain steady, meaning that net foreign trade
will be neutral over the forecast horizon.

— Government spending will advance at an anemic 0.7 percent pace
in 2010, and by a still modest 1.2 percent in 2011 due to persistent
fiscal stress at the state and local levels and the winding down of
federal stimulus spending legislated in 2009. Regarding the federal
debt, 60 percent of survey respondents are extremely concerned about
its implications over the next five years, outranking, by a wide margin,
all other factors considered.

— Inflation will remain low, most likely because of persistent
economic slack. Labor productivity gains, while slowing, will still
outpace compensation, resulting in falling unit labor costs in 2010. In
fact, inflation forecasts have been trimmed somewhat since the February
survey. The NABE panel expects the core PCE deflator (personal
consumption expenditures price index excluding food and energy) to rise
just 1.3 percent this year. That figure resides precisely in the
“central tendency” of the Federal Reserves January Open Market
Committee (FOMC) forecasts. NABEs forecast of the PCE core deflator for
2011 is toward the high end of the Federal Reserve’s central tendency,
at 1.7 percent. Despite this generally sanguine near-term outlook,
panelists are more concerned for the future about higher rather than
lower inflation. “Inflation” scored 2.8 on the 1-to-5 scale of concerns
over the next five years, whereas “deflation” ranked just 1.6 on that
same scale.

— Reduced inflation expectations prompted the NABE panel to push
back its forecast for monetary tightening, measured by increases in the
federal funds interest rate. The first interest rate increase by the
FOMC is now slated for the fourth quarter of 2010, with the fed funds
rate at 0.5 percent by year-end. This compares with a 0.75 percent rate
in the February forecast. Rate hikes are expected to continue into next
year, with the target hitting 2.0 to 2.5 percent by year-end 2011. This
“more patient” Fed outlook, combined with reduced inflation
expectations, is also reflected in a slightly lower interest rate for
the 10-year Treasury note over the near-term. By the middle of next
year, however, the yield on the 10-Year T-note is still expected to
reach 4.5 percent.

** Market News International Washington Bureau: 202-371-2121 **

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