United States Forecast Summary
If “April is the cruellest month,” applies to the economy we are in trouble this year given the data that arrived in March. There has been a steady flow of discouraging numbers culminating with last week’s dismal employment report. The impact on our forecast has been to significantly lower our estimate of growth both during the just completed first quarter and for all of 2015.
The second round of revisions to fourth quarter GDP data left growth in output unchanged at 2.2%, with the details slightly positive. Consumption growth was raised to 4.4% from the strong 4.2% estimate a month ago, while growth of equipment investment was reduced to 0.6% from an already very weak 0.9%. Both of these numbers are consistent with the effects of the drop in energy prices – more discretionary income from lower gasoline prices encouraging consumption and lower oil prices discouraging drilling. The latter effect would also be expected to show up in investment in structures, but here the growth estimate was increased. In the trade sector both export and import growth were increased, with the former more significant causing the estimate of the trade deficit to decrease by $5 billion.
Recent Monthly Data
Monthly indicators have been mostly negative. The monthly consumption estimate for February showed a decrease, following weak growth in both December and January. Some of this was probably weather related, but it could also indicate that most of the gasoline effect was in the fourth quarter. Similar weakness was present in the data on industrial production, which have shrinkage in the manufacturing sector for three straight months through February. The ISM manufacturing index also decreased in those three months and again in March, although at 51.5 it still indicates expansion. Housing starts fell drastically in February to their lowest level since January of last year. Here again weather was certainly involved.
On the other hand, consumer sentiment, which had fallen in February, rebounded in March. The same pattern was present in auto sales for the two months. And the ISM non-manufacturing index for March sustained the strong 56+ reading of the previous three months.
Finally, the March data for the labor market were terrible. Payroll employment increased just 126 thousand, and there were negative revisions to January and February. The unemployment rate remained at 5.5%, mostly due to a decrease in the labor force.
Our forecast has weakened significantly over the past two months. For all of 2015 our forecast now has output growth of just 2.7%. This is 0.5% below our February estimate, and 0.2% below the growth rate over the past six quarters. In deriving this forecast we made no effort to adjust for weather effects or the impact of the west coast port strike (since such adjustments would be pure guesswork). As a result, it is quite likely that Q1 will be weaker than our 2.2% estimate. If this turns out to be the case, there could be some catch-up effect in Q2 relative to our estimate.
Our basic story line during the past year has been that the economy had finally broken out of the 2% growth pattern that had been in place over the first four years of the recovery. This shift occurred in mid-2013, and was the result of increases in spending by households, business, and government, which drove a strong labor market. We expected that the improvement (to growth that was averaging about 2.9%) would persist and even accelerate a little. We have not abandoned this scenario, but the weak fourth quarter and likely weaker first quarter are producing second thoughts. An alternate story line might be that the improvement during 2013-14 rested in a fundamental way on the boom in the energy sector. And as that boom has dissipated over the past six months, the improved growth has receded as well. If data during the second quarter improve as we expect, it would increase our confidence in our original scenario. If the data trends during the past quarter persist, the alternate scenario would gain credibility.