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Karim writes:

Doesn’t break a lot of new ground. Forecasts appears consistent with prior statements and still casts financial markets in a fragile light despite recent run-up in equities. Makes no mention of upping asset purchases and issues longer-term fiscal warning:

*The most recent information on the labor market–the number of new and continuing claims for unemployment insurance through late May–suggests that sizable job losses and further increases in unemployment are likely over the next few months.

Agreed. And unemployment continues to increase until GDP growth outpaces productivity gains.

*Recent data also suggest that the pace of economic contraction may be slowing.

*Nonetheless, a number of factors are likely to continue to weigh on consumer spending, among them the weak labor market, the declines in equity and housing wealth that households have experienced over the past two years, and still-tight credit conditions.

*We continue to expect overall economic activity to bottom out, and then to turn up later this year.

Agreed. Deficit spending is not large enough to support aggregate demand and savings desires at levels that equate to modest GDP growth

*Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further.

Agreed. And weak overseas economies both limit export growth and bode for increased imports.

And higher crude and product prices raise nominal imports and dampen us domestic demand.

Also, state and local govt are also just now engaging in cutbacks and tax increases.

*Financial markets and financial institutions remain under stress, and low asset prices and tight credit conditions continue to restrain economic activity.

Yes, this allows lower taxes and/or higher government spending to support aggregate demand. Unfortunately, the noises from the administration are moving in the other direction, with President Obama’s latest statement that the US has ‘run out of money.’

*Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.

I do not agree. In my book fiscal responsibility means supporting demand at desired levels of output and employment.

Financial sustainability is not an issue with non convertible currency and floating exchange rate policy, as it was when on the pre 1934 gold standard..

Non-Mfg ISM up from 43.7 to 44 but details weaker.

  • New orders down from 47 to 44.4
  • Backlogs down 44 to 40
  • Export and import orders both down

This indicates the slowing in the rate of decline is slowing, supporting the forecasts of nominal GDP hovering near 0 and unemployment continuing to rise.

  • Employment up from 37 to 39
  • Prices paid up from 40 to 46.9

There could be a rethinking of the output gap and an upward adjustment of the ‘neutral rate of unemployment if CPI continues to rise.