United States Forecast Summary
Economic news during March was mostly positive, although without much exuberance. Our updated forecast continues to see consumer spending supporting slow growth this year, with some acceleration farther out.
The final set of data for the fourth quarter of last year did not change the broad picture of the economy at year-end. Overall the revisions were slightly encouraging with total output growth upgraded from 1.0% to 1.4%. The largest change was higher consumption of services. There was also a significant increase in residential investment – to boom level growth of 10.1%. Revisions for the business sector, on the other hand, were disappointing, with the decline in non-residential investment increased from -1.9% to -2.1%. The estimate for government spending was increased slightly, but remained essentially flat with the third quarter level. Finally, while the international sector remained grim (decline in exports, rising deficit) the revisions were positive (less decline in exports, less increase in the deficit). The broad picture remains unchanged: Slow growth driven entirely by household spending, with government barely positive and both business investment and trade exerting negative influence.
Recent Monthly Data
Monthly data continue to be mildly encouraging. Both income data (for February) and employment data (for March) indicate that the underpinnings for consumer spending remain in place. Real disposable income rose 0.3% (monthly rate) following similar increases in December and January. For this period the annualized increase is a solid 3.8%. In the labor market employment rose 215 thousand, the fifth increase of that level or higher in the past six months. In the household survey unemployment was up a tick to 5.0%, but that was due mainly to another large increase in the labor force. The labor force participation rate in March was 63.0% up by 0.6% from its low in September. That amounts to 1.5 million additional potential workers.
Confirming this situation (and perhaps also reflecting a very strong month for the stock market) consumer sentiment rose in March. Auto sales, however, weakened to a 16.6 million annual rate, their lowest pace in over a year.
Other indicators remain unenthusiastically positive. Housing starts rose in February to their best level since September. Total industrial production was down in February, but manufacturing increased. March data for both ISM indices showed increases, with manufacturing back above 50 for the first time since August.
Finally, there were some potentially ominous traces on the inflation front. The overall consumer price index was down in February and up just 1% from a year ago. However, this is due entirely to energy. But crude oil prices have been rising since mid- February, and here in Indiana gas prices are back above $2 per gallon. This shift coincides with a reversal in the exchange rate from appreciation to depreciation. While depreciation may be positive for U.S. trade, it has negative implications for inflation. The core CPI has risen 2.3% over the past year. That rate has been accelerating since May 2015.
As can be seen in the chart, our forecast for the next year is again little changed. We now expect growth in the current quarter of 1.4%, down 0.2% from last month. For all of 2016 growth comes in at 1.9%, and over the final years of the forecast period we now expect growth of 2.4%. Both these values are up 0.1% from last month.
For the next year we expect the household sector to support modest economic growth in the face of weak business investment and headwinds from the international sector. This scenario has downside vulnerability to shocks that impact consumer willingness to continue to spend. There is upside from positive developments in either the international outlook or the business sector. Indeed, this positive scenario is the basic story playing out in our forecast for 2017 and beyond. The hints of inflation mentioned above are a very unpredictable (currently low probability) wildcard. In the short-run higher inflation could be stimulative, but the ultimate implications would be fraught with danger.