United States Forecast Summary
Economic data for most of the past month were uninspired hinting that the U.S. recovery, now well into its sixth year, could be showing its age. Then last Friday came the Employment Situation report, which put talk of impending doom into doubt. Our take-away is that the recovery remains in place, that 2015 will show improved growth, but that the upside potential is limited.
Revisions to fourth quarter GDP data were slightly positive overall, even though the headline number for output growth was reduced from 2.6% to 2.2%. All of the decrease and then some came from a reduction in the rate of inventory accumulation. Growth in final sales increased from 1.8% to 2.1%. This improvement was due mainly to a much stronger estimate for business investment (up from a dismal 1.8% to an adequate 4.8%) with spending on equipment, intellectual property, and structures all being raised substantially. Other revisions to private sector spending were negative, but much smaller. Lower consumption spending on goods was almost offset by higher purchases of services. Housing was lowered slightly, and the trade deficit was raised a little. Finally, the decline in government spending was lessened in the revised data.
Recent Monthly Data
Monthly indicators have been mixed. January real disposable income growth was put at 0.9% (monthly rate), which would be extraordinary except that it was largely due to the decline in energy prices. In nominal terms disposable income rose by 0.4% in January. Real consumption spending was up 0.3%.
Housing starts for January were down slightly, while industrial production rose, but not enough to offset its December decrease. Consumer sentiment fell in February, as did auto sales. The February ISM index for manufacturing was lower for the third consecutive month. Their non-manufacturing measure was essentially flat.
Finally, the February data for the labor market were again good. Payroll employment rose 295 thousand, marking a full year of increases above 200 thousand. The unemployment rate dropped two ticks to 5.5%. Some of the decline was due to a decrease in the labor force, but this followed a large labor force increase in January.
We now think that growth in the current quarter will come in at 2.7%, compared with 3.0% last month. The difference comes from downward changes to expected growth across the board. The largest negative changes are for consumer spending on durable goods and business purchases of equipment. Our estimate for imports has increased, which is also a negative for GDP.
We expect growth to move up to 3.4% in the second quarter. This is about 0.1% above our February outlook. Growth remains above 3% in the second half, although slightly below that in our February forecast. For all of 2015 (fourth quarter to fourth quarter) growth is 3.1%, slightly down from last month.
Our baseline forecast continues to anticipate a continuation during 2015 of the modest acceleration in growth that began in mid-2013, followed by slight retrenchment as capacity constraints become an issue. Year-over-year GDP growth is now at 2.4%, just slightly above the norm of the previous three years. But come the first quarter data (due toward the end of April) things will look much different since the -2.1% 2014 first quarter will be replaced by something like +2% (or higher if our forecast is correct). This will raise the year-over-year number to around 3.5%. The current figure has led to talk that the U.S. economy is making no real progress from its pattern during the first four years of the recovery. This is not the case – growth in the economy has picked up recently. When the new higher number materializes next month there will probably be talk that the economy has blasted off in historic fashion. This too will be an overstatement.