IMF likes U.S. economic prospects

The International Monetary Fund is joining the chorus of organizations and experts who believe that the U.S. is rising from the recession faster than expected.

The agency predicts American Gross Domestic Product will drop by 2.5 percent this year, as opposed to the 2.8 percent it forecast earlier in the year. The IMF expects the U.S. economy to expand by 0.75 percent next year. Only two months ago it said growth would be non-existent.

According to The Wall Street Journal, "John Lipsky, the IMF's deputy managing director, interpreted the recent increase in Treasury bond yields as a positive sign."

The U.S. is still faced with a double-edged sword if the IMF is correct. An improving growth rate could help drive up demand for oil and oil-based products, influencing crude-based product prices.

Oil has already hit $72, to some extent based on the fact that China and other BRIC nations are growing faster than expected, increasing the need for crude. A new U.S. appetite for oil and other commodities could cut into consumer spending and business margins at companies that use gas or petrochemicals.

A rapid economic recovery still poses the risk of inflation. Factories have cut back production. A sharp increase in demand, even if tepid by the standards of three years ago, could catch manufacturers by surprise. Scarce goods means high prices.

Interest rates could be affected, too. The Fed has kept rates low to try to lift the economy. Early signs of inflation could cause it to raise rates. That may temper inflationary forces, but it could also make it harder for consumers to use credit cards and borrow money for houses and cars. An increase in mortgage rates has already begun to hurt housing demand.

An economic recovery is not necessarily as attractive as it seems.

Douglas A. McIntyre is an editor at 24/7 Wall St.


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