EoW November 2007

Transat lant ic Cable

Heading into fall, many analysts were tamping down their expectations and trimming their economic forecasts. On 22 nd August, Citigroup issued a new forecast indicating that growth would fall short of its earlier estimates. On the following day Goldman Sachs, which had already reduced its forecast to 1.9%, warned that the housing market was probably overpriced by more than 15%. Other forecasters also now believe that the housing slump, which has had only a modest effect on consumer spending and economic growth, will lead to a slowdown over the next year or two. Global Insight (Waltham, Massachusetts) on 23 rd August predicted markedly slower growth for the third quarter, and reduced its forecast for all of 2007 to 1.9% from 2.1%. The research firm also sees dimmer prospects for growth in 2008. Negative factors – along with high oil prices and slower growth in productivity – are the stasis in housing and a credit squeeze in the wake of the countrywide lending spree. As always, the view fromWashington tends to be sunnier than from other places. Also on 23 rd August, the Congressional Budget Office (CBO) predicted that the summer’s turmoil in markets would not retard economic growth, even as the agency warned of uncertainties and pared its earlier forecast for growth this year to 2.1%, from 2.3%.

The CBO brought the same double perspective to the federal budget. Noting that the budget deficit would decline this year to $158 billion, the lowest level since 2002, it also reiterated warnings that the trend is ‘unsustainable’ in the long term. The budget office estimated that – if tax cuts introduced by President George W Bush are extended indefinitely beyond their expiration date in 2010, and Congress continues to protect most taxpayers against increases in the alternative minimum tax – over the next 10 years government revenue would fall $3.4 trillion short of the baseline forecast. Deficits would return to high levels of more than $200 billion a year. Celebrating the decline in the budget deficit, Mr Bush said: “It shows that our government is on a path to meeting the goal I set forth of putting the budget into surplus by 2012.” Of course, if the goal is not met it will be the problem of Mr Bush’s successor – who will have his or her hands full on many other counts, as well. Data published in late August by the Internal Revenue Service show that in 2005, for the fifth consecutive year, Americans earned a smaller average income than in the peak year of 2000. Except for a single year since the end of World War II in 1945, this experience of income contraction is unique. Nearly half of Americans reported incomes of less than $30,000 in 2005; two-thirds made less than $50,000. The new tax statistics show that, while the combined income of all Americans in 2005 was slightly larger than it was in 2000, population growth over the period makes for a smaller average income. The growth in total income (as distinguished from average income) was concentrated among those making more than $1 million. Over the five years to 2005, the number of these taxpayers grew by more than 26%, to 303,817, from 239,685 in 2000. A sore point with Citizens for Tax Justice, a private advocacy group for low and middle-income Americans, is that the millionaires, who constitute less than a quarter of 1% of all taxpayers, accounted for almost 47% of the total income gains in 2005 as compared with 2000. According to a separate analysis by the group, whose headquarters is in Washington, DC, people with million-plus incomes also received 62% of the savings from the reduced tax rates on long-term capital gains and dividends that President George W Bush signed into law in 2003. The nearly 90% of Americans who make less than $100,000 a year collected 5.3% of the total savings from reduced tax rates on investment income. They saved an average $318 on their investments. A White House spokesman, Tony Fratto, said the fact that those in the upper-income brackets accounted for nearly all of the income growth and that the majority of investment tax breaks went to those making more than $1 million was ‘not a very interesting story.’ Mr Fratto attributed the drop in average income to ‘the significant wrenching hits that [the US] economy took in 2001 and 2002, so no one should be surprised that what a bubble economy created in the late 1990s and 2000, where economic data were skewed, would take some time to recover.” And now for something new: the average American grows poorer

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EuroWire – November 2007