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Deutsche Bank Upgrades U.S. Economic Outlook: ‘This Time Is Different’ Says Economist

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All eyes are on Ben Bernanke & Co. this week.

The Federal Open Market Committee (FOMC) will release its latest statement and economic projections on Wednesday. Fed Chairman Bernanke and Fed Vice President Janet Yellen remain committed to the central bank’s current policies: near-zero short-term interest rates and a monthly $85 billion bond-buying stimulus program.

Recent positive economic data – higher retail sales, a better-than-expected report on industrial production and a five-year low in the four-week moving average for new jobless claims – are indicative of an economy on an upswing. Deutsche Bank recently upgraded its U.S. economic outlook, raising its Q1 GDP estimate to 3% from 1.5% and its full-year growth projection to 3.5% from 3%.

“It’s really remarkable what we’re seeing in the economic data now,” says Deutsche Bank economist Carl Riccadonna in an interview with The Daily Ticker. “The last three years looked like we might be pulling out of the doldrums…but this time is different.”

Riccadonna argues that the Fed’s accommodative monetary policy has finally trickled down to U.S. consumers and businesses. Banks are willing to extend credit again, industries want to expand operations and a more sanguine American public is willing to take on debt after years of fiscal prudence. Mortgage applications and new auto loans have picked up and consumers are using their credit cards to shop again. The Federal Reserve Bank of New York said U.S. consumer debt totaled $11.3 trillion in the fourth quarter of 2012, 0.3% higher than the previous quarter and a break from the downward trend that began after personal debt peaked in the third quarter of 2008.

Riccadonna also says changes in the labor market will force businesses to hire more workers, another factor that will increase economic productivity this year. The labor market may be stuck at 2005 levels but “you can only squeeze so much output out of the existing labor force…looks like we have run the course,” Riccadonna notes.

The Fed has vowed not to raise interest rates until the national unemployment level falls to 6.5%. The jobless rate was 7.7% in February. Bernanke and Yellen are not “flinching” from that pledge, according to Riccadonna. They both believe the labor market “has a long ways to go before they’re convinced the economy has mended,” he says. Employment has to return to pre-recession levels, which would be about 18 months from now with the current pace of job creation, before interest rates will rise, Riccadonna adds.

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