PIMCo's El-Erian Foresees Brighter US Outlook Following Obama's Tax Cut Compromise

(December 13, 2010) — The Chief Executive Officer of Pacific Investment Management Co. (PIMCo) Mohamed El-Erian has upped his US growth forecast.

El-Erian has asserted that he sees the US economy growing 3% to 3.5% in the fourth quarter of next year from PIMCo’s earlier estimate of 2% to 2.5%. “We revised this week our outlook for US growth in 2011 taking into account Monday’s announcement on additional fiscal stimulus measures,” El-Erian said in a recent interview with Reuters, referring to President Barack Obama’s compromise deal to extend all Bush-era tax cuts for two years. The deal, still to be approved by the House and Senate, additionally proposed extending unemployment compensation for the long-term jobless, and reducing social security payroll taxes for 2011 by 2 percentage points.

Despite positive growth projections, El-Erian warned, according to Bloomberg: “What we don’t know yet is whether that will be enough not just to change the economy’s trajectory for one year but to place it on a medium-term sustainable path.” El-Erian’s assertion describes his view that the positive results for the US economy stem partly from policymakers’ tendency of relying increasingly on unconventional strategies,  such as QE2, to achieve US growth.

In regards to the European Union, El-Erian said he expects the euro area’s economy to grow up to 0.75% next year. “Europe is on a completely different track than the US,” he told Bloomberg. “It is trying to achieve sustainable growth by getting its economic house in order through fiscal austerity.

Both Bill Gross, manager of the $256 billion Pimco Total Return Fund, and El-Erian have noted that the “new normal,” which describes how growth will be depressed by consumer retrenchment and tighter financial regulation, will continue to dampen the US economy. PIMCo has adjusted to a new normal by offering equity funds to investors in April, while moving into stocks to allow customers to diversity their holdings as areas such as emerging markets outperform other regions.