–Sluggish Growth Likely After Winding Down of Stimulus Package
–Employment Picture Looking More positive

By Yali N’Diaye

WASHINGTON (MNI) – U.S. states are expected to rush to use
available funds — while they can — to boost infrastructure spending,
boosting the nation’s GDP growth over the next two quarters, Standard &
Poor’s says in its latest CreditWeek published Wednesday.

Past that phase, however, the winding down of the stimulus package
will likely translate into “sluggish” growth, although “the employment
picture is looking more positive,” Chief Economist David Wyss writes.

“We expect a sharp jump in infrastructure spending in the next two
quarters as states try to use available stimulus funds before the
authorizations expire, which will cause a spurt in real GDP,” Wyss says.

And while the U.S. economy will still be able to grow when the
government withdraws the stimulus spending, “the withdrawal will
probably result in this growth being sluggish.”

That said, the withdrawal is expected to be “gradual,” which should
dampen its negative impact on growth.

The major drag on growth remains private construction the report
says.

While the residential sector has stabilized, “private
nonresidential construction continues to decline, reflecting high office
and retail vacancy rates.”

As a result, Wyss expects U.S. real GDP growth to be 3% this year
and 2.9% in 2011.

In its World Economic Outlook Wednesday, the International Monetary
Fund revised up its estimate for U.S. 2010 GDP growth to 3.1% from 2.7%
in January.

Wyss estimates that the U.S. recession ended in August 2009.

“If the recession is declared to have ended in August 2009, which
is our current estimate, the 20-month duration would be the longest in
the postwar ear, exceeding the 16-month recessions that began in 1974
and 1982,” he says.

Despite the recovery, the economist remains concerned about deficit
prospects.

He notes the recovery has been largely supported by federal
spending, and “stimulus spending will continue into fiscal 2011, with an
additional $200 billion spent on top of the $700 billion bill for fiscal
2009 and 2010.”

Even more worrisome is the issue of entitlement programs and the
interest on national debt, he continued, which “together will cost more
than the current tax system can bring in.”

At the state level, the financial picture looks even more
challenging, Wyss says, noting that unlike the federal government, state
governments, except Vermont, “are constitutionally required to balance
their budgets and thus don’t have the option to borrow money like the
federal government.”

In practice, however, many manage to run deficits.

Going forward, the withdrawal of federal funds will force many
states “to make major spending cuts or increase taxes,” Wyss says,
especially as the budget relief Congress is likely to provide for states
in fiscal year 2011 will be much more limited and “restricted to
specific programs” such as health care and unemployment benefits.

On the monetary side, the exit from liquidity programs is
“progressing smoothly,” the report says.

“We expect that the Federal reserve will delay any hike in the
federal funds rate while it continues to withdraw from these special
programs, probably after the November election and possibly in 2011,”
Wyss adds.

That said, the withdrawal of government support to banks makes the
future of the mortgage market “uncertain,” and therefore the residential
housing market.

The rating agency expects the 30-year conventional mortgage rate to
be 5.4% this year, 6.3% in 2011 and 6.6% in 2012.

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

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