1. Ingeniería

JAN 01.30.2015
ECONOMICS: US PERSPECTIVES
STRONGER US ECONOMY AND IMPLICATIONS FOR
FED POLICY
+ Joseph G. Carson, US Economist and Director—Global Economic Research, [email protected]
We believe the shift in sectors leading the
current growth paints a picture of an
economy that’s finally emerging from its
subpar pace. And in the January Federal
Open Market Committee (FOMC) statement, policymakers acknowledged that
improved growth by saying that “economic
activity has been expanding at a solid
pace.”
But there’s an interesting hitch: unlike past
years, the US economy is entering 2015
with strong momentum and unexpected
stimulus emanating from a sharp drop in
oil prices and long-term interest rates. So
policymakers will have to balance the
faster growth and low-inflation outlook. In
the latest FOMC statement, policymakers
also noted that they think the drop in
inflation is due to transitory factors. That’s
why we believe that an official rate hike
midyear still appears to be likely.
Economy’s Performance
The initial report on fourth-quarter real
GDP from the US Bureau of Economic
Analysis (BEA) shows an annualized gain of
2.6%, slightly below the consensus
estimates (and ours) of 3% to 3.5%. Yet, if
recent history is any guide, that fourthquarter preliminary estimate will be revised
higher when more complete data (including all of December data) are available over
the next month or two.
The big surprises in this fourth-quarter
report were the initial estimates for real
merchandise exports and imports. The
BEA assumed a very sharp deterioration in
the nominal trade deficit in December.
Even on the surface, that looks to be
questionable: the plunge in oil prices alone
should result in a lower nominal deficit.
Best Quarterly String of GDP Growth
Since 2004
Real Gross Domestic Product
5
Percent Change Annual Rate
The strength and composition of gross
domestic product (GDP) growth over the
past three quarters is very unusual for an
economic recovery in its sixth year. To be
sure, real GDP growth averaged 4% over
the past three quarters. That’s the best in a
decade (Display 1). Equally interesting, the
mix of that recent growth shows a rotation
toward more consumer spending (Display
2) and housing—two sectors that ordinarily
record strong gains at the outset of a
business cycle, not in the middle or the
end.
Display 1
4
3
2
1
0
(1)
(2)
(3)
2010
2011
2012
2013
2014
Through December 31, 2014
Source: Haver Analytics and US Bureau of Economic
Analysis (BEA)
Display 2
Fourth-Quarter Consumer Spending
Gains Broad and Strong
Real Personal Consumption Expenditures
4.5
Percent Change Annual Rate
Over the past three quarters, the US economy expanded at a 4%
annualized rate, the fastest gain in a decade. The economy is also
starting 2015 with added stimulus from lower energy prices and the
plunge in long-term interest rates. The stronger dollar poses a
modest headwind, but domestic demand has picked up and will
likely be the main growth engine. Policymakers face a difficult
balancing act in the coming months, but we still expect official rates
to be lifted at midyear.
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2010
2011
2012
Through December 31, 2014
Source: BEA and Haver Analytics
2013
2014
Upcoming data releases will yield better
insight for the “true” fourth-quarter growth
rate. We believe the initial estimates will be
revised to reflect what appears to be an
improved (rather than deteriorating) trade
balance.
Even without any revision, the string of
recent quarterly gains in real GDP is quite
impressive. The fourth quarter’s annualized
gain of 2.6% was preceded by a 5%
annualized gain in the third quarter and a
4.6% annualized gain in the second
quarter—making this three-quarter string
the fastest cumulative gain (+4%) in real
GDP growth since late 2003/early 2004.
In the fourth quarter, real consumer
spending rose 4.3%, its strongest quarterly
showing since 2004. Strong gains in
consumer spending on durables (+7.4%)
led the way, but spending on consumer
nondurables (4.4%) and services (3.7%)
also posted their biggest quarterly
advances in some time. Construction
spending also increased, with spending on
residential investment increasing 4.1%.
Business spending on equipment and
software experienced a minor contraction
of 1.9%. But spending on industrial
equipment declined 12.6%—much of that
because of cutbacks in the oil and gas
sector. Real fourth-quarter government
spending contracted 2.2%, with the drop
entirely attributable to the sharp 12.5%
decline in defense spending. This pullback
was expected, as it followed an unexpected 16% annualized gain in the third
quarter. State and local spending advanced
1.3% in the fourth quarter. For the year
ending in 4Q, total government spending
rose 0.8%. That marks the first annual
increase since 2008, and it also indicates
an end to the fiscal drag.
Monetary Policy
The official statement of the January 28
FOMC meeting showed that policymakers
characterized the economy as expanding
at a “solid pace” and that the labor
markets had been generating “strong job
gains.” That’s the first time since 2006 that
policymakers had described economic
growth and labor markets in those (strong
and solid) terms. We interpret the statement to mean that policymakers are
getting prepared to raise official rates off
the zero-interest level. But to do that, they
need to see that the fall in headline
inflation is, indeed, temporary and does not
spill over to core inflation. We expect core
inflation to move higher in 2015—a direct
result of stronger US consumer markets.
The list of factors that policymakers are
monitoring includes labor market conditions, indicators of inflation pressure and
inflation expectations, and readings on
financial and international developments.
The items on the list—and their order—are
important. As one can see, domestic
factors dominate the list. And it’s worth
noting that policymakers aren’t oblivious to
overseas events and risks, but international
developments could move the economy in
a better or a worse direction.
In the end, we do expect the Fed to be
guided by what is happening in the
domestic economy. With growth running in
the 3.5%–4.0% range and labor markets
tightening further in 2015, we are still
calling for a midyear official rate hike. n
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