Wall Street is beginning to believe in the US economy again. Economists at Goldman, Sachs & Co, Lehman Brothers Inc and Bear, Stearns & Co in the past week have all cited signs of a strengthening economy.
New York-based Goldman Sachs sees "meaningful upside" potential for its US economic outlook for the first time since 2000, senior economist Ed McKelvey said late Monday.
Consumer confidence rose to the highest in a year last month as Congress passed a US$330 billion tax cut.
The Dow Jones Industrial Average rose in four of the past five weeks, bond investors scaled back bets that the Federal Reserve will have to further cut interest rates, and energy prices retreated from highs set before the Iraq war.
Manufacturing expanded in May for the first time this year, and the dollar's 25 percent drop against the euro in the past year is making US exports cheaper.
"Now that the tax cut is law and uncertainty about the war is resolved, businesses will increase spending and the recovery should be back on track," said Brian Wesbury, chief economist at Griffin Kubik Stephens & Thompson Inc in Chicago, in an interview.
"Some of the numbers are already getting better. I think they'll continue to get better," he said.
McKelvey's report from Goldman Sachs, the world's third-largest securities firm by capital, kept its forecast for this year's economic growth of unchanged at 2.2 percent partly because there's still a danger that consumer spending may ebb and that state and local governments will slash more expenditures.
"What we're saying now is there is a meaningful risk on the upside, whereas previously we didn't think there was," McKelvey said. "The risks are somewhat more symmetric than before."
The US economy expanded at a 1.9 percent annual rate in this year's first three months after growing at 1.4 percent pace in the final three months of last year.
That's still less than the 3.3 percent average annual rise of the past three decades.
Lehman economist Ethan Har-ris, in a report dated Friday, boosted the firm's annual growth rate forecast to 3.5 percent for the year's second half because of the tax cut President George W. Bush signed last week.
Lehman, the world's fourth-largest investment bank, previously projected the economy would expand at annual rates of 3 percent in the third quarter and a 3.2 percent rate in the fourth.
"The tax cut is still being underestimated," said David Malpass, Bear Stearns' chief global economist, in a note to clients Monday.
The tax cuts will increase consumers' disposable personal income more than 12 percent in the next year, he said.
The US stock market has already gained about US$750 billion in value since the package was passed May 21, he said.
Bear Stearns is the sixth-largest US investment bank.
Some of the first bits of postwar economic data have added to the optimism. The Institute for Supply Management on Monday sai that its US manufacturing index rose for the first time this year last month.
On Friday, the University of Michigan's May consumer confidence index increased to 92.1, the highest since last June, from 86 in April.
Initial applications for unemployment benefits have drop-ped four of the past five weeks.
Higher corporate profits may boost business spending. As of a week ago, first-quarter profit was up 12 percent from a year earlier at the 486 companies in the Standard & Poor's 500 Stock Index that had already reported results.
Information technology "spending is definitely stabilizing and is slightly up," said John Kelley, chief executive officer of Broomfield, Connecticut-based McData.
"New technology coming out will spur more buying," he said.
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