United States Forecast Summary
Data during the past month suggest that the very bad winter had only a transitory impact on the economy. Whatever shortfall occurred during January and February is likely to be made up during March and April. Since this has always been our expectation, our updated forecast is little changed from a month ago.
NIPA Data Revisions
The third release of the fourth quarter NIPA data contained only a few changes of note. The estimate for real GDP growth was raised from to 2.4% to 2.6%. This came mainly from stronger household consumption of services. This strength in consumption was partly offset by downward revisions to business investment in intellectual property and in structures. The change to intellectual property investment continues a pattern of large revisions since the category was introduced last summer.
As mentioned above recent monthly data have been generally positive. The labor market data for March had a payroll increase of 192 thousand, all of it in the private sector. Unemployment held at 6.7% even though the labor force increased by over 500 thousand. Hours worked bounced back from a weather reduced February.
This March bounce-back was also present in consumer confidence (up 4 points), auto sales (at a 16.4 million rate, the highest since 2007), and in both ISM indices. February housing starts were flat, while permits rose.
Most of this was pretty much in line with our expectations, so the impact on our forecast was minimal. Our estimate for first quarter output growth increased by about 0.2%. There were small positive changes to consumption and business investment, and small downward adjustments for housing, the trade balance, and government spending. After the first quarter the forecast has output growth moving up toward the 3% level. Our model shows the unemployment rate resuming its downward path, falling below 6% by year end.
Our near term outlook has the economy picking up momentum from its recovery to date pattern of growth slightly above 2% toward growth more in line with the long-run potential of the economy – that is, growth a little below 3%. This expectation rests on a definite increase in business investment, along with some improvement in consumption, and an end to the decline in government spending. We continue to assume that the Fed will complete the phase-out of its quantitative easing during the remainder of this year and will begin to raise its target for short-term interest rates during the second quarter of next year. We don’t think either move will have much impact on the real economy, although the latter could produce some instability in the financial markets.