United States Forecast Summary
Recent data indicate that the U.S. economy ended 2014 with its supercharger on and all cylinders (save one) firing. The final estimate of third quarter GDP was a large upside surprise, with consumer spending leading the way. This was reinforced by a very strong report on monthly consumption for November. For our forecasting model the result is a significantly stronger outlook both for the fourth quarter of last year and for the first half of this year.
The BEA provided a bit of holiday cheer with its final estimate of third quarter 2014 GDP. Growth in total output was raised to 5%, up 1.1% from its previous estimate. There were positive revisions across the board for domestic spending, but two-thirds of the increase was due to consumption (mostly of services). The estimate for health care consumption was raised by over $12 billion. This more or less reverses a downward adjustment to health spending that was a big negative in the first quarter.
Recent Monthly Data
Coincident with the revised NIPA data the BEA released its monthly estimates for personal income and consumption. These too were a major upside surprise, with the November increase in real consumption expenditures put at 0.7% (monthly rate). Disposable income growth was put at 0.5% for the month, below spending, but still quite strong. If December spending is merely flat from November consumption will grow faster for the fourth quarter than in the third. The large decline in gas prices is certainly a factor for consumers.
Other monthly indicators have been mixed. Industrial production was up strongly in November, continuing its solid performance during 2014. Housing starts, on the other hand, were lower for the month and essentially flat for the past year. [This is the one misfiring cylinder mentioned above.] December consumer confidence rose slightly, but expectations were a little lower. Both have been flat over the past six months.
Overall the economic data reviewed above leave us optimistic about the near term outlook. Our updated forecast is significantly stronger than a month ago.
We now think that growth in the just completed fourth quarter will come in at 3.4%. While this is well below the third quarter, it is up by 0.7% from our previous forecast. For 2015, fourth quarter to fourth quarter, we anticipate GDP growth will be 3.5%, nearly 0.3% higher than a month ago.
The primary factor driving the increase in growth is stronger consumption spending, especially on services. Our model now puts consumption growth during 2015 at 3.2%. This is a full percentage point above the norm for the five years since the end of the recession. Normally we would be very skeptical about a change of this magnitude, but in the current situation it seems plausible, for two reasons. The first is great improvement in the labor market over the past year. The second is the dramatic decline in energy prices. The drop in gasoline prices implies well over $100 billion in extra discretionary income for households.
Another element in the higher growth forecast is a significantly stronger housing sector for 2015 than during 2014. Unlike the case for consumption, there are no specific developments to support a change from the existing low growth, except that the current level of housing activity is low relative to past norms such as household creation and income growth. If housing remains in its recent funk, it would lower our GDP growth estimate by perhaps 0.1%.
Our baseline forecast may have a slight upside bias in that it contains growth in consumption and in housing that is above the recent norm. However, the U.S. economy currently has no major imbalances, and the growth in our forecast is below that for the past two quarters.