Recent data suggest the U.S. economy has rebounded fairly well from its contraction in the first quarter of the year, giving financial-market participants, as well as American businesses and consumers, reason to be somewhat optimistic. Job gains accelerated after a lull in March, and housing activity strengthened after a deep winter chill. Also, at long last, households are spending some of their now-rising wages and the money they’ve saved at the gas pumps.
In this light, we have raised our forecast for second-quarter U.S. GDP growth to 2.8%, from 2.1% in May. The Bloomberg June survey of consensus forecasts had second-quarter growth at 2.5%.
But while markets may have breathed a sigh of relief, there’s a lingering feeling that the first quarter’s contraction represents more than a mere blip. In fact, a number of indicators suggest U.S. growth will toddle along at best. In this light, we now expect full-year U.S. GDP growth of 2.3%, down from 2.4% in our May forecast and below last year’s economic expansion of 2.4%. Worse yet, we don’t expect the world’s biggest economy to outgrow these “terrible twos” any time soon.
To be sure, much of the economy has warmed up, concurrent with the weather. And it’s not just jobs data that suggest the ongoing recovery remains on track. Consumers have hit the malls and bought big-ticket items such as cars, and even the housing market has shown signs of renewed strength. Additionally, businesses seem more optimistic about economic conditions, with most manufacturing sentiment readings climbing further into positive territory.
However, although the domestic side of the economic equation seems to be rumbling along–with temporary factors such as the weather, West Coast port disruptions, and the so-called residual seasonality dissipating–the drag from still-low oil prices and the strong dollar, which has weighed on capital spending and production, may still do some damage. And, of course, businesses will need to unwind their inventory accumulation in the first quarter, which will damp spending.
Even with a second-half rebound, 2015 won’t likely be the year the U.S. economy enjoys the level of expansion that typically follows recessions. Although we expect some pickup in 2016, we see GDP growth remaining below 3% through the end of the decade. Our reasons for holding this view are similar to concerns that the International Monetary Fund and the Congressional Budget Office raised last year–to wit, the effects of an aging population on the economy and the prospect of only modest productivity growth.
Whether the U.S. enters into what former Secretary of the Treasury Lawrence Summers has called “secular stagnation”–a period of slow growth, marked by only marginal increases in the size of the workforce and small gains in productivity–remains to be seen. And while specific causes of secular stagnation are difficult to determine, a slower-growing and aging population, greater globalization, and increasingly unequal distribution of income and wealth are generally recognized as contributing factors.
Either way, we’ve yet to even approach the level of post-recession economic expansion that we’ve historically seen. When you consider that the 2.2% average annual growth (2010-2014) we’ve had since the recovery started is only about half the 4.6% five-year average following U.S. recessions (going back 50 years), the recent underperformance is especially notable.
Nonetheless, we think the Federal Reserve will soon raise benchmark interest rates–for the first time in almost a decade. The apprehension that Federal Open Market Committee (FOMC) members showed at their April meeting has eased, and we expect policymakers to lift the federal funds rate twice this year, starting in September–with the target rate rising to 0.5%-0.75% by year-end. However, the central bank is certainly well aware that, while the economy continues to strengthen, there are reasons to take baby steps in normalizing monetary policy. We now expect the fed funds rate to be 1.5%-1.75% by the end of 2016.