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8/22/2019 US Economic Outlook - Lower 2013 Growth Forecast on Slow Start to Year
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abcGlobal Research
Extensive revisions to historical US GDP data show the average growth rate from the end
of the recession to the first quarter of 2013 is now estimated at 2.2%, compared to 2.1%
previously. This increase in measured output is not enough to change our views on the
growth of potential GDP or on how much slack currently exists in the economy.
The revised GDP data do have an impact on our forecast for the growth of GDP this year.
The new data show a slower rate of growth than before for Q4 2012 and Q1 2013. That
means 2013 got off to a much slower start than previously estimated, and that the average
level of GDP over the four quarters of 2013 will likely be lower than we previously
forecast. In late June we estimated a 1.8% increase in the average level of GDP in 2013
compared to 2012. With the revised data in hand, that estimate falls to 1.5%. Our forecast
for growth in 2014 is unchanged at 2.4%. On a Q4 to Q4 basis our forecast for 2103 GDP
growth is only slightly changed, down to 1.9% from 2.0%. For 2014, the Q4/Q4 forecast
remains the same at 2.5%.
A slowdown in business investment has hampered the growth of GDP in the past year. We
expect a pickup in investment spending in the year ahead. However, there is a risk that
concerns over fiscal drag and slow growth in the global economy could temper investment
plans by many businesses. Consumers seem to have settled into a steady 2.0% growth
track and are unlikely to create a serious drag on economic growth in the year ahead. But
business spending is more of a wild card. Sluggishness in investment spending could
curtail GDP growth in the year ahead.
Given all the uncertainties that exist regarding both the economys near-term growth
prospects and the outlook for fiscal policy, we continue to believe that the FOMC will
hold policy steady at its next meeting in September. A decision to taper QE, in our view,
is more likely to come at the December FOMC meeting.
5 August 2013
US Economic Outlook
Lower 2013 growth forecast on slow start to year
New data show 2013 got off to a slower start than previously
estimated; the slow start lowers our forecast for 2013 GDP
growth to 1.5% from 1.8%
Our 2.4% GDP forecast for 2014 is unchanged
Our expectation for weak growth in the near term means wedo not expect the FOMC to start QE tapering until December
Economics
US
Kevin Logan
Chief US Economist
HSBC Securities (USA) Inc.
+1 212 525 3195
Ryan Wang
Economist
HSBC Securities (USA) Inc.+1 212 525 3181
View HSBC Global Research at:http://www.research.hsbc.com
ssuer of report: HSBC Securities(USA) Inc
Disclaimer &Disclosures
This report must be readwith the disclosures andthe analyst certifications inthe Disclosure appendix,and with the Disclaimer,which forms part of it
http://www.research.hsbc.com/http://www.research.hsbc.com/8/22/2019 US Economic Outlook - Lower 2013 Growth Forecast on Slow Start to Year
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New data, same trendNew GDP data confirm lackluster growth
On 31 July, the Bureau of Economic Analysis released a comprehensive revision of GDP data going all
the way back to 1929. The level of GDP was raised as spending on research and development was
re-classified as a capital expenditure rather than as an input into production. The development of
entertainment and artistic originals was also classified as fixed capital since many of these goods continue
to produce revenue for their creators, just as a piece of capital machinery might for a manufacturing firm.
While these changes may help statisticians better measure what is actually going on in the economy, they
do little to settle any of the debates that are currently important to financial markets. Investors are
interested in GDP data as a guide to the economys potential output, whether current production is close
to that potential and, if not, how fast is the economy growing toward that potential level. On this score,
the new data change perceptions only slightly.
The new data show that quarterly GDP growth averaged 3.43% from 1947 to 2007. The quarterly data
start in 1947, and 2007 marks the start of the recent financial crisis. The old data showed a 3.38% growth
rate. In other words, there is no significant difference. More things are being measured as part of GDP,
but the growth rate of these new items has been only fractionally faster than the rate of growth of the rest
of the economy.
The same conclusion can be reached even when the GDP data are broken up into shorter periods in order to
see whether there has been any change in the historical pattern of GDP growth. The measured growth of
GDP is nearly identical with both the old and new data for each of the three 20 year periods from 1947 to
2007. Growth averages 4.1% in the first 20 years, slips to 3.2% for the next 20 years, and then to 3.1%.
Table 1. HSBC US economic forecasts (if changed, previous months forecast in parentheses)
____Actual____ __________Projected__________ ___Q4/Q4 % change___ _Annual avg % change_Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 2012 2013 2014 2012 2013 2014
Gross Domestic Product (% quarter annualized) 1.1 1.7 2.0 (1.9) 2.6 (2.5) 2.3 (2.5) 2.5 2.0 1.9 (2.0) 2.5 2.8 1.5 (1.8) 2.4Final Sales to Domestic Purchasers 0.5 2.0 2.1 2.4 2.2 2.4 2.1 1.7 2.3 2.4 1.6 2.3
Personal Consumption 2.3 1.8 1.7 2.0 2.0 2.1 2.0 1.9 2.1 2.2 1.9 2.0Business Fixed Investment -4.6 4.6 5.0 5.9 5.5 5.9 5.0 2.6 5.7 7.3 2.7 5.6Residential Construction 12.5 13.4 15.0 12.0 10.0 12.0 15.5 13.2 11.0 12.9 14.1 11.7Government Purchases -4.2 -0.4 -0.4 -0.4 -0.8 -0.8 -1.1 -1.4 -0.8 -1.0 -2.0 -0.6Net Exports (ppt contribution to GDP) -0.3 -0.7 0.3 0.1 0.1 0.1 0.3 -0.1 0.1 0.1 0.0 0.1Inventory Change (ppt contribution to GDP) 0.9 0.4 -0.4 0.0 0.0 0.0 -0.5 0.2 0.0 0.2 -0.1 0.0
Industrial Production (% quarter annualized) 4.3 0.5 2.6 2.1 3.1 3.5 2.8 2.4 3.3 3.6 2.3 2.8Unemployment Rate (average) 7.7 7.6 7.4 7.3 7.2 7.0 8.1 7.5 7.0GDP Price index (% quarter annualized) 1.3 0.7 2.4 1.8 1.8 1.8 1.8 1.6 1.9 1.7 1.5 1.8Consumer Price Index (% year-on-year) 1.7 1.4 1.7 1.7 1.8 2.2 1.9 1.7 1.8 2.1 1.6 1.9Core Consumer Price Index, (% year-on-year) 1.9 1.7 1.8 1.9 1.8 1.9 1.9 1.9 1.7 2.1 1.8 1.8
Federal Budget Balance (FY), USDbn -1089 -647 -600as a % of nominal GDP -6.8 -3.9 -3.6Current Account Balance, USDbn (average) -440 -424 -400
as a % of nominal GDP -2.7 -2.5 -2.3
Source: HSBC
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Though the longer-term growth rates were little changed by the revisions, there were some noticeable
changes regarding recent growth in economic activity (Figure 1). Quarterly growth rates since the end of
the last recession in the second quarter of 2009 are now seen as a bit more volatile, and on average were
slightly stronger than then previously measured. The average growth rate from the end of the recession to
the first quarter of 2013 is now estimated at 2.2%, compared to 2.1% previously. One can be glad that a
bit more output was produced, but this slight increase in measured production does not change our views
on the growth of potential GDP or on how much slack currently exists in the economy.
Figure 1. Revised GDP data does little to change the pattern of growth
Source: BEA
Slightly faster growth, slightly lower inflation
With respect to how much slack is in the economy, its worth noting that the measurement of inflation
dropped slightly for the past few years. According to the newly revised data, the GDP price index -- the
most comprehensive measure of the average level of prices -- rose at a 1.6% annual rate from the end of
the recession through the first quarter of this year. That compares with a 1.7% rate as measured under the
old system. It is obviously not much of a difference, but it does mean that the slightly faster rate of GDP
growth since 2009, as now measured, does not appear to be closing the gap between the current level of
output and the economys potential level. If it were, then there would be a tendency for inflation to be
moving higher rather than lower.
Since the new GDP data suggest that a large output gap still persists, downward pressure on inflation may
continue in the near term. Over the past four quarters, inflation as measured by the GDP price index has
dropped to 1.4%, down from 1.7% in the second quarter of 2012 (see Figure 2). Meanwhile, the slowdown
in the Federal Reserves preferred measure of inflation, the core PCE price index, has been a bit more
pronounced, down from 1.9% a year ago to only 1.2% in the second quarter this year (see Figure 3).
-9.0%
-6.0%
-3.0%
0.0%
3.0%
6.0%
9.0%
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Old
New
Average 1947 to 2007 = 3.4%
Average Q2 '09 to Q2 '13 = 2.2%
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Near-term growth outlook
The revised GDP data do have an impact on our forecast for the growth of GDP this year, though the
change is mostly technical. The new data show a slower rate of growth than before for Q4 2012 andQ1 2013. That means 2013 gets off to a much slower start than previously estimated, and that the average
level of GDP over the four quarters of 2013 will likely be lowered than we previously forecast. In late
June we estimated a 1.8% increase in the average level of GDP in 2013 compared to 2012. With the
revised data in hand, that estimate falls to 1.5%. Our forecast for growth in 2014 is unchanged at 2.4%.
On a Q4 to Q4 basis our forecast for 2013 GDP growth is only slightly changed, down to 1.9% from
2.0%. For 2014, the forecast remains the same at 2.5%.
Consumer spending resilient
GDP grew at an average 1.4% annualized rate in the first half of 2013, half the average 2.8% rate posted
for all of 2012. Somewhat surprisingly, the slowdown was not due to a cutback in the growth of spendingby consumers. Federal taxes were increased this year, with the temporary two percentage point reduction
in the payroll tax rate coming to an end, and with income tax rates being increased on high-income
earners. Despite that, consumer spending rose at an average 2.0% rate in the first half of this year, the
same as the average growth rate in 2012 (see Table 1 on page 2 for details of our GDP forecast).
Consumer finances have gotten some support from lower interest rates in the past year. For homeowners
in particular, the opportunity to re-finance mortgages at lower interest rates has pulled down the ratio of
debt-service payments to disposable income. Rising house prices have reduced the number of
homeowners who are underwater on their mortgages, enabling more people to qualify for re-financing.
In addition, rising house prices can increase consumer confidence and reduce the demand for
precautionary savings.
Figure 2. Revised GDP data show inflation moving lower Figure 3. Core PCE inflation well below the Feds 2.0% target
Source: BEA Source: BEA
0.0%
1.0%
2.0%
3.0%
4.0%
05 06 07 08 09 10 11 12 13
GDP price index, YoY%
0.5%
1.0%
1.5%
2.0%
2.5%
05 06 07 08 09 10 11 12 13
Core PCE, YoY%
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On top of that, the increase in average stock prices in the past year has led to a strong improvement in
household balance sheets, at least in the aggregate. In the first quarter of this year, the value of direct
equity holdings and mutual fund shares held by households reached a new peak, finally surpassing the
last peak valuation level seen in 2007. All of these developments have probably helped to offset the
adverse effects of higher tax rates in the first half of this year.
Still, these positive financial developments were not enough to lift the growth of consumer spending to a
higher level. Despite modest quarterly gyrations, the trend in consumer spending has not changed very
much since the end of the recession in the second quarter of 2009. Since that time, consumer spending has
grown at a 2.2% rate and has not shown any sign of accelerating off that subdued pace (see Figure 4).
Figure 4. Consumer spending stuck in a slower growth track compared to pre-crisis trend
Source: BEA
For the year ahead, we expect that consumer spending will stay in a roughly 2.0% growth track, held
down by the effect of tax increases, by the reluctance to increase the use of credit, and by slow growth in
nominal incomes. The situation will not be helped by the ongoing fiscal contraction by the federal
government or by the resulting cutbacks in government jobs.
Investment spending still sluggishThe addition of a new category of investment spending to the GDP data did not help the growth outlook
very much. In its comprehensive revision, the BEA added intellectual property products as a new
category of business investment. This grouping includes software, research and development
expenditures, and certain entertainment, literary and artistic originals. These items now make up
approximately 3.6% of GDP. The production of these items has been growing at roughly 3.4% annually,
right in line with the economys long-run growth rate. Since the end of the recession in 2009, the
contribution of this category to the overall growth rate of GDP has been in line with its share of GDP.
However, other categories of investment spending have started to flag recently. The overall growth of
business spending on equipment and new structures has decelerated sharply since the second quarter of
2012. As a result, business spending added only 0.3 percentage points to GDP growth in the past year,
much less than the year before. GDP grew 2.8% from Q2 2011 to Q2 2012, with business investment
spending accounting for a full percentage point of that growth (see Figure 5).
9.3
9.7
10.1
10.5
10.9
11.3
11.7
05 06 07 08 09 10 11 12 13
Real personal consumption expenditures, USD trillions
2.9% growth trend from earlier peak
2.2% growth trend from recession end
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Over the past four quarters, GDP has increased only 1.4%, a marked deceleration from the previous
years growth rate. The slowdown in business investment spending accounted for about half of the drop-
off in GDP growth, or 0.7 percentage points. The slowdown in business spending is somewhat surprising
since average profit margins are high, financing costs are low, and average stock prices have been rising
strongly for the past year. However, the growth in business profits has slowed. The BEAs measure of
economy-side corporate profits increased only 2.1% in the year through Q1 2013. Thats down from a
growth rate of 12.8% the year before. Profits are high as a share of national income, but the growth of
profits may be stalling out.
Figure 5. Business investment spending surprisingly soft over past year
Source: BEA
Business profits and business expectations about the future growth in demand are the key drivers of
business investment spending. If businesses start to feel more confident about the future growth of final
demand, investment spending may pick up again. We expect a faster pace of business investment
spending in the quarters ahead. A recent rebound in new orders for capital equipment points in that
direction. Spending on commercial structures such as factories and office buildings is also likely to pick
up, we believe, thanks to low long-term interest rates and an increased willingness of banks to lend for
commercial property development.
Even so, we do not expect an investment boom in the year ahead, just enough to help support a moderate
economic expansion at close to the economys trend growth rate. However, there is a risk that concerns
over fiscal drag and slow growth in the global economy could temper investment plans by many
businesses. Consumers seem to have settled into a steady 2.0% growth track and are unlikely to be a drag
on economic growth in the year ahead. But business spending is more of a wild card, and sluggishness in
investment spending could curtail GDP growth in the year ahead.
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
07 08 09 10 11 12 13
Business investment spending, contribution to GDP growth, %
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Fiscal Drag and the Federal Reserve
Tax increases and cutbacks in spending by the federal government have imposed a serious drag on
economic growth this year. At the same time, uncertainties surrounding the effects of fiscal contraction
are influencing the outlook for monetary policy. Policymakers at the Federal Reserve are closely
monitoring the effects of federal fiscal policy. Chairman Ben Bernanke made this clear in his 18-19 July
monetary policy testimony to Congress:
The pickup in economic growth projected by most FOMC participants partly reflects their view thatfederal fiscal policy will exert somewhat less drag over time, as the effects of the tax increases and thespending sequestration diminish
As I noted, the economic outcomes that Committee participants saw as most likely in their Juneprojections involved continuing gains in labor markets, supported by moderate growth that picks up overthe next several quarters as the restraint from fiscal policy diminishes.
Over the past four quarters, cutbacks in federal spending have subtracted 0.3 percentage points from
overall GDP growth almost entirely associated with reduced spending on national defense (Figure 6).
Cutbacks in defense spending predate the onset of sequestration at the beginning of March this year.
The BEA reports that nominal expenditures on national defense peaked in the middle of 2011. Reduced
spending over the past two years has reflected the combined impact of the drawdown of US military
operations in Iraq and Afghanistan, as well as the broader reductions to the defense budget that were
implemented prior to sequestration.
Figure 6. The fiscal drag on economic growth intensified in early 2013
Source: Bureau of Economic Analysis
These developments have had a significant impact on Department of Defenses (DoD) employment of
both military personnel and of civilian workers (Figure 7). The number of active duty military personnel
started to fall in the middle of 2011, reflecting the drawdown from overseas operations. Over the past two
years, the number of personnel on active duty has declined by about 50,000, to 1.39mn earlier this year.
It is worth noting that the Bureau of Labor Statistics does not include military personnel in its estimates of
either payroll or household employment. Only civilian employment within the DoD is included. DoD
06 07 08 09 10 11 12 13
-0.4
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
National defense
Nondefense
Total federal government
Federal government contribution to real GDP growth over the past year, percentage points:
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civilian employment began to fall in early 2012, as the Department implemented reductions in spending
mandated by the Budget Control Act of 2011. After spending limits were cut further by sequestration this
year, the DoD instituted hiring freezes and layoffs of temporary workers, resulting in a continued drop in
civilian employment.
Figure 7. Job cuts at the Department of Defense are a drag on the overall growth in employment
Source: Bureau of Labor Statistics, Department of Defense
However, the most notable cutbacks in defense spending have not necessarily been reflected in lower
employment. According to the BEA, the most pronounced spending cuts have been taken the form of
fewer purchases of intermediate goods and services, particularly in maintenance categories such as
installation support, weapons support, and personnel support.
Most of these items had already seen a reduction in spending over the past two years, again indicative of
the drawdown of overseas military operations as well as broader budgetary cuts. But the slowdown
accelerated in Q4 2012, probably influenced in part by the imminent threat of sequestration as part of the
year-end fiscal cliff. After falling sharply in Q4, the level of intermediate purchases continued to
decline in Q1 and Q2.
Figure 8. Large dollar cutbacks in Defense purchases; employee compensation has yet to decline
Source: Bureau of Economic Analysis
1360
1380
1400
1420
1440
480
500
520
540
560
05 06 07 08 09 10 11 12 13Department of Defense civilian payroll employment (left axis) Active duty military personnel (right axis)
Department of Defense employment, 000
175
200
225
250
275
300
150
175
200
225
250
275
04 05 06 07 08 09 10 11 12 13
Defense employee compensation: military plus civilian (left axis)
Defense purchases of intermediate goods & services (right axis)
Government expenditures, USDbn (annual rate)
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Ongoing fiscal restraint presents a complication for the Federal Reserve in its assessment of the economy
and the appropriate course of monetary policy. Speaking before the National Bureau of Economic
Research on 10 July, Mr. Bernanke noted:
But there are also some risks which I think are very important for us as policy makers to look at. First,
it's still early to say that we have weathered the fiscal restraint. I think it's very difficult to know how long
the lags are between congressional decisions and actual spending and production decisions. So, we're
going to continue to watch and see whether growth is resilient going forward for the rest of the year
Again, our projections are that there'll be some pickup and growth, but that does depend on
overcoming the remainder of the fiscal headwinds.
Financial markets are once again paying close attention to the latest budgetary developments in
Washington. Congress must pass budget legislation by 30 September to avoid a government shutdown
associated with a lack of spending authority. Disagreement about potential changes to tax and spending
policies has raised the possibility that Congress will be go to the brink once again. At a minimum, a
lack of agreement could cause to Congress to resort to short-term, stop-gap measures to avoid a
shutdown, as occurred during the spring of 2011.
If a budgetary stand-off were to persist into October, fears surrounding the debt limit on federal
borrowing would come back into play. The soft deadline for the debt ceiling was reached in May; since
then the Treasury Department has relied on extraordinary measures to stay within its borrowing
headroom. The hard deadline for borrowing could be reached sometime in October or November, with the
exact timing dependent on the pace of Treasury tax receipts.
The minutes of recent FOMC meetings indicate that the policymakers at the Fed are inclined to reduce the
size of the current program of quantitative easing (QE) from the current USD85bn per month in combined
purchases of agency MBS and longer-term US Treasury securities sometime later this year. The timing
of that decision will be influenced not only by data on the labor market and the economys overall growth
but also by the outlook for further fiscal contraction.
The impact of budget sequestration on spending in the current fiscal year (through September) is still
uncertain. Furloughs of federal employees, for example, mostly started in July even though the process of
sequestration began in March. Direct cuts in federal spending may also intensify in the current quarter.
Meanwhile, whether sequestration will continue in the new budget year starting in October is still up in
the air. Leaders of both the Democratic and the Republican Parties are currently searching for some
compromise that will replace the near-term spending cuts required by sequestration with longer-term
cutbacks in entitlement spending. The outcome of those negotiations will have an important bearing on
the economys near-term growth prospects, and by implication, on the FOMCs decision regarding when
to start tapering the size of the current QE program.
Given all the uncertainties that exist regarding the economys near-term growth prospects and also
regarding the outlook for fiscal policy, we continue to believe that the FOMC will hold steady at the next
policy meeting in September. A decision to taper QE, in our view, is more likely to come at the DecemberFOMC meeting, particularly if our expectation for a pickup in GDP growth in Q4 turns out to be correct.
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Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Kevin Logan and Ryan Wang
Important DisclosuresThis document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the
clients of HSBC and is not for publication to other persons, whether through the press or by other means.
This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer
to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this
document is general and should not be construed as personal advice, given it has been prepared without taking account of the
objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice,
consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek
professional investment and tax advice.
Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may
not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of
the investment products mentioned in this document and take into account their specific investment objectives, financialsituation or particular needs before making a commitment to purchase investment products.
The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an
investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls
in value that could equal or exceed the amount invested. Value and income from investment products may be adversely
affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative
of future results.
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives)
of companies covered in HSBC Research on a principal or agency basis.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking revenues.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research.
* HSBC Legal Entities are listed in the Disclaimer below.
Additional disclosures
1 This report is dated as at 05 August 2013.2 All market data included in this report are dated as at close 02 August 2013, unless otherwise indicated in the report.3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Researchoperate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/orprice sensitive information is handled in an appropriate manner.
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Disclaimer
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8/22/2019 US Economic Outlook - Lower 2013 Growth Forecast on Slow Start to Year
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