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Indiana University Bloomington

Center for Econometric Model Research

United States Forecast Summary

May 2016


For some time there has been an expectation that sooner or later the economy would accelerate out from the “new normal” of 2% GDP growth. That may be happening, but with deceleration rather than acceleration. After a weak final quarter of 2015, the advance estimate for 2016Q1 was even worse. Our new forecast has another weak quarter, followed by some improvement in the second half of this year.


The initial National Income and Product Account estimates for the first quarter were mostly disappointing. Overall output growth was barely positive at an annual rate of 0.5%. Growth in final sales (which ignores a negative effect from inventories) was just 0.9%. Combined with fourth quarter value of 1.4% the past half-year had GDP growth at a dismal 1.0% rate. As can be seen in the table to the right, this is less than half the level over the previous year.

First quarter GDP growth was below our February forecast by a significant 1.2% (equivalent to $48 billion). The miss was mainly due to a disappointing result for business investment. We had forecast growth of just 2.0%, but the actual outcome was minus 5.8% – a difference of $44 billion. “Growth” in the equipment component was -8.6% (10.7% below our forecast); investment in structures was even worse at -10.6% (10.0% below forecast). Consumption also fell short of our forecast, as did exports. The latter was offset by a similar result for imports. Government spending was a little better than we expected.

The only really positive component was residential investment, which boomed nearly 15% (more than double our forecast).

Our forecast from a year ago covering the past four quarters was considerably closer to the mark. We forecast GDP growth of 2.4%, moderately higher than the actual 1.9%. A good part of the error was inventory accumulation that was below our guess. Final sales (at 2.3%) were just 0.2% below our forecast. This result was, however, partly due to offsetting errors. Our estimates for consumption, structures investment, and the government sector were reasonably accurate, but we were considerably too optimistic about equipment and intellectual property investment and too pessimistic with respect to housing. As in the quarterly result, both sides of the trade account were much weaker than we expected.

One of the ominous aspects of the slowdown of the past two quarters is that it was broadly based. As can be seen in the table, compared to the previous year, the only component of demand to show improvement is housing. Consumer spending growth is off nearly one-third. Business investment and exports have gone from increase to decrease. Growth in government spending has been about flat, but at a very low rate.

Growth Rates (annualized)

  2014Q4-2015Q3 2015Q4-2016Q1
Total GDP


Business Invest.

Over the past year our forecast has become steadily more pessimistic. The data for the first quarter suggests we still have a ways to go. We are reminded of the comment by an observer of events in government: “I try to be cynical, but I just can’t keep up.”

Recent Monthly Data

Recent monthly indicators have a mild negative bias. The labor market data for April is an example.

The payroll survey showed an increase in employment of 160 thousand. This was about 40 thousand below expectations and over 80 thousand below the average for the previous six months. Not great, but also not terrible. It is very similar to the number for January and both the three-month and six-month averages remain above 200 thousand. In the household survey, the labor force participation rate, after rising for six straight months, registered a decrease. Other things being equal, this would tend to lower the unemployment rate, but instead it remained steady at 5% with the drop in the labor force nearly matched by a drop in household employment. Again not great, but not terrible. Unemployment remains close to its full employment level (4.7% in our estimation) and the six-month average increase for the household measure of employment is 267 thousand per month.

Other indicators are similarly hard to read. Overall consumer spending and auto sales were a little weak in March, but the latter bounced back in April. And income growth has been relatively strong. Consumer sentiment declined slightly in April, but not below its range of recent months.

On the business side of the economy housing starts and building permits both fell in March. Given that housing was the only really strong sector in the first quarter, this is a little ominous. Industrial production, both in total and for manufacturing repeated February decreases in March. This weakness was reflected in an April decrease in the ISM index for manufacturing. Not great, but not terrible. IP is still being affected by large declines in the mining sector. The ISM manufacturing measure remains above 50 (indicating expansion), and their non-manufacturing measure was up in April.

The bottom line of all the new data is that we have again lowered our near-term outlook.

Baseline Forecast

As can be seen in the chart, our new forecast is less optimistic for the current quarter, about unchanged for the second half of this year and then a little more optimistic about the final four years of the forecast period. [Note that in line with our standard procedure for the May forecast we have extended the forecast horizon by a year.] We now expect growth this quarter to be just 1.4%, which is 0.5% below our February estimate. The difference is due to weaker consumer spending on goods and to weaker business investment, although in both cases stronger than in Q1. Our current forecast for second quarter residential investment is the reverse – stronger than in our February outlook, but weaker than the first quarter actual. We continue to expect modest continued deterioration in the trade balance and weak growth from the government sector.



In the second half of this year we now put growth at 1.9%, implying full year growth of just 1.5%. The former is marginally above February, the latter 0.3% below. Relative to the first half of the year, the improvement is due to somewhat stronger consumer spending and business investment.


After this year growth averages 2.4%, up 0.2% from February. The labor market drives the difference. In our current forecast unemployment declines a little more (to 4.7% versus 4.8% in February) and the participation rate is a little higher (about 63% versus 62%). Together these two differences produce about 10 thousand more jobs per month, which feeds through the model to produce higher growth. This could easily be too optimistic, especially the higher participation rate, although it is consistent with recent experience (excepting April).

Risks to the Forecast

We think our baseline forecast, while definitely more pessimistic than our view even last month, has an optimistic tinge. There is some possibility to the upside, but more to the downside.

On the positive side we think the most likely scenario would involve a better situation for the household sector leading to stronger results for consumption and perhaps for housing. Over the rest of this year our forecast has the household saving rate one-half percent above its average for 2013-2014. If the labor market continues to look positive (even at the April level), households could easily up their spending.

On the downside is a long (and growing) list of risks. The international situation seems to have stabilized a little, with higher commodity prices playing a role. However, policy makers seem to have run out of ideas. When the options being discussed are negative interest rate vs. “helicopter money” vs. greater deficit spending (with debt levels already at record highs and rising) it does not inspire confidence. Not to mention the domestic political situation.


Recent data from the economy are disconcerting. The last two quarters of GDP data show a five-cylinder economy with two (investment and trade) that are not firing. Worse, two of the other three show signs of worn piston rings. Only housing is doing well, but it is too small to support an expansion. Government spending is weak and, while it will not collapse, budget problems make any significant expansion very unlikely. That leaves consumption, which recently has weakened. With consumption growth at recent levels (about 2%) overall growth will struggle to average 1.5%.

Our baseline forecast has consumption regaining some momentum and investment at least showing a pulse. This is sufficient to return to the “new normal” or a little better. Much beyond that seems to us a long shot. It is a lot easier to spin scenarios with negative shocks that limit growth to recent levels or worse.