US ECONOMY: DELIBERATE AUGMENTATION HIGHLIGHTS FEEBLENESS

The US economy grew slower than Wall Street analysts had expected in the third quarter, and the housing market continued to struggle, highlighting the challenges of sustaining a fragile recovery. Analysts, who had initially forecast that 2010 would see a modest upturn in housing, are now predicting that prices will decline in 2011 by as much as 10 per cent, as a record number of distressed properties floods the market. The ongoing weakness has prompted some Wall Street economists to call for major intervention by Washington to head off prolonged stagnation.

Sales of existing homes grew by 5.6 per cent in November to seasonally adjusted 4.68m properties, but that is 28 per cent below year-ago levels. Although house prices rose 0.7 per cent in October, the index compiled by the Federal Housing Finance Agency has fallen 3.4 per cent over the preceding 12 months. Rising interest rates are also acting as a headwind by making it more expensive to refinance an existing mortgage or get a new loan. Purchase applications fell 2.5 per cent in the most recent week, while refinancing activity was down 25per cent to its lowest level since April, according to the Mortgage Bankers Association. .


2011 OUTLOOK: The combination of undesirably low inflation in the US, deflation in Japan, the ongoing sovereign debt crisis in Europe and a BBB recovery in virtually all of the mature economies implies that G10 central banks will keep their foot on the monetary accelerator for much or all of 2011. With official interest rates near zero in major economies and quantitative easing in various disguises continuing at least in the G3, monetary policy looks set to remain super-expansionary and will support the ongoing reflation of the global economy, in our view. The US economy is expected to register gross domestic product growth of 2.7% in 2011, according to Reuter's data, with the US unemployment rate remaining high, at 9.8%.


On that basis, many analysts see the S&P 500 scoring double-digit gains and finishing 2011 at 1400 or higher. Analysts are also forecasting that the DJIA will continue to rally though it is unlikely that the Index will reach a record next year however possibility of gaining 13000 still on the cards. Indeed, the weak labour market has been a main concern of consumers and investors alike over the past year. The private sector has added more than 1.1m jobs in the past 11 months; however this has hardly been enough to replace the eight million-plus lost to the recession or curb the worrisome unemployment rate. However, going into 2011, as the economy is forecast to expand at a pace of 3.2 per cent, an uptick in hiring is expected with corporations expending their hoarded cash to ramp up production.