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Trade, tax cuts, boost growth forecasts

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Dec. 7 (Bloomberg) -- U.S. Trade Representative Ron Kirk talks about an agreement with South Korea on a revised free-trade accord. Kirk, speaking with Margaret Brennan on Bloomberg Television's "InBusiness," said the agreement will boost American employment and help confront mounting cynicism of such deals in the U.S. Kirk also said the U.S. has "more work to do" to get Korea to fully open its market to all cuts and ages of American beef. (Source: Bloomberg)

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By Howard Schneider
Washington Post Staff Writer
Friday, December 10, 2010; 10:04 PM

Economic forecasters are boosting their year-end and 2011 estimates for U.S. growth, prompted by a narrowing trade deficit, an unexpectedly large round of proposed tax cuts and an increase in consumer confidence

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The revisions this week were substantial, as analysts took particular note of the tax deal struck between the White House and congressional Republicans.

The agreement included some provisions that were already expected and built into forecasts, such as an extension of the Bush-era tax cuts. But other elements of the deal, such as a proposed 2 percentage point reduction in the Social Security payroll tax, were not anticipated.

Analysts say the extra tens of billions of dollars that workers will find in their paychecks at the start of the year could add as much as a half of a percentage point or more to U.S. economic growth in 2011.

The tax package "injects meaningful extra stimulus into the economy," said Nigel Gault, chief U.S. economist for the IHS Global Insight consulting firm, who raised his projection for growth next year from 2.4 percent to 3.0 percent.

U.S. markets were slightly higher, with the Dow Jones Industrial Average adding 40 points, or 0.35 percent.

IHS economist Brian Bethune said the deal also removed a key point of uncertainty for businesses and households.

"There is a fortuitous kind of alignment . . . that is definitely providing a boost to the economy and a boost to expectations," he said. "One of the things that had been dragging things down was the uncertainty."

The data, if it continues stronger than expected, could muddy the recent Federal Reserve decision to buy hundreds of billions of dollars of Treasury bonds to further lower interest rates. The Fed announced the program before the scope of the recent tax deal became known. If the bill stimulates the economy, or if it is accelerating on its own, Fed policymakers may be more hesitant to embark on the program because of a heightened risk of inflation.

International trade statistics for October provided a particular surprise, with the U.S. trade deficit falling to its lowest level in nine months due to a surge in exports and a drop in imports. Although the rise in the value of exports was broad-based, including all major categories of goods and services, analysts cautioned that the outcome might be short-lived: the value of oil imports may well rebound, for example. Excluding crude oil, imports rose.

Still the report was positive, as U.S. exporters seemed to benefit from rapid growth in emerging markets to sell more food, heavy equipment and other goods. Notably, the monthly U.S. trade deficit with China narrowed from a recent high of $27.8 billion to $25.5 billion, with U.S. exports to the country jumping to $9.3 billion, from $7.1 billion the month before.

Commerce Secretary Gary Locke said the trade numbers are a "sign that we're moving in the right direction" towards the Obama administration's goal of doubling exports in coming years.

Trade deficits are considered a drag on a country's economic performance. But the October shortfall of $38.7 billion, down from $44.6 billion the month before, was less than expected by analysts.

For much of the year trade was "a big drag on overall growth . . . but, based on this report, it will add to growth . . . possibly quite substantially," for the rest of the year, consulting firm Capital Economics said in a report.

Economists for PNC Bank said in a research note that the narrowing of the trade deficit, if sustained for the rest of the year, would add half a percentage point or more to U.S. economic growth.

Exports for the year are almost back to where they were before the crisis took hold in 2008. Through Oct. 2008 the United States had sold $1.565 trillion in goods and services abroad. The figure so far for 2010 is $1.507 trillion. Since the start of the year, monthly exports have increased about 10 percent.

Imports have been slower to rebound, and the total trade deficit for the year so far, roughly $420 billion, is about 30 percent below where it was for the same period in 2008.

The October trade data, in part, led forecasting firm Macroeconomic Advisers to boost its estimates for growth in the final quarter of 2010 from 2 to 2.7 percent, on an annualized basis.


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