Research Seminar in Quantitative Economics
University of Michigan Ann Arbor, MI 48109
734-764-2567
www.rsqe.econ.lsa.umich.edu
George A. Fulton, Director
For Release: 3/18/2015
Saul H. Hymans, Director Emeritus
The U.S. Economic Outlook for 2015–2016
Executive Summary: March 2015
A Choppy End to 2014
After growing at a 5 percent annualized pace in the
third quarter of 2014, economic growth decelerated to
only 2.2 percent in the final quarter of 2014. A swing
in net exports accounts for the bulk of the slowdown,
with an additional contribution from a fall-off in defense spending after a one-time boost in the third
quarter. Lower prices at the gas pump freed up some
cash late in the quarter and fueled extra consumption, whose contribution to growth rose to 2.9 percentage points—the highest since early 2006—and
offset part of the drag from net exports and defense
spending.
Residential construction disappointed
once again, adding only a tenth of a percentage point
to GDP growth. Measured relative to the final quarter
of 2013, the level of real GDP was 2.4 percent higher
at the end of 2014—a reasonable measure of the underlying strength of the U.S. economy.
Uneven Beginning to 2015?
The first-quarter growth reading could be significantly skewed by the recently resolved labor dispute
and work slowdown at the West Coast ports, which
normally handle around two-thirds of national cargo
container traffic. Huge backups of ships and tractor
trailers could take months to clear.
The fallout from the oil price collapse does not help
to clarify the picture either. While much of the effect of lower gasoline prices on consumer spending
growth may already be behind us, the impact on the
oil industry looms ahead, manifesting in a decline
in oil-exploration-related business fixed investment,
production, and jobs. Lower oil prices going forward
will lead to significant belt-tightening in the industry,
which will likely cost the most oil-dependent states
jobs and revenue.
Another recent development that could cloud our
forecast in the near term is the sharp acceleration
of dollar appreciation. The value of U.S. currency
shot up during the closing quarter of 2014 and early
in 2015, currently showing double-digit growth relative to a year ago. This development has likely been
caused by moves toward looser monetary policy by
many trading partners at the same time as the Fed
is looking to start raising rates. The rise in the dollar
could exert downward pressure on imported goods
prices, complicating the Fed's decision-making process, and without more foreign GDP growth could
also suppress growth of our exports.
Vehicle sales took a step back early in 2015; the annualized pace of sales has declined by about 400,000
units relative to the fourth quarter. This slowdown is
likely due to severe winter weather in several states
and a shortage of some popular new truck models.
Employment Steady As She Goes
Payrolls expanded by 295,000 jobs in February,
the twelfth consecutive month with job gains above
200,000. Average growth was a robust 275,000 per
month during that time frame, in which the unemployment rate fell 1.2 percentage points—from 6.7 percent
to 5.5 percent. Although most of the change in the
unemployment rate is attributable to strong growth in
private-sector employment, nine consecutive months
of gains to public payrolls also contributed.
Fed Entering the Game
Despite measures of underlying inflation weakening over the past several months, an increase in the
federal funds rate target (and interest paid on excess
reserves) during 2015 seems to be a foregone conclusion. The questions are when, and how quickly?
On balance, we believe that, given the weakening inflation outlook, the Fed will not tighten at least until
the end of September. After the rates are off the floor,
the arguments in favor of starting later will still apply
and could lead the Fed to raise the short-term policy
rates less frequently than during the previous ratetightening cycle. We expect increases of a quarter
of a percentage point per quarter. Given the modest
pace of tightening and low expected inflation, the 10year Treasury yield and the conventional mortgage
rate rise slowly during the forecast period, reaching
3 and 4.6 percent by the end of 2016, respectively.
Congress Watching from the Dugout
In the wake of the Great Recession and extraordinary fiscal changes, the current trajectory of federal
“The Michigan Model”
over....
receipts and expenditures is now on a relatively predictable path. Although potential flashpoints such as
the debt ceiling limit, exhaustion of the Highway Trust
Fund, and reform of the Social Security Disability Insurance program loom, these inevitable sources of
conflict are likely to be navigated with an eye towards
2016 and a strong desire to preserve the status quo.
Federal expenditures are expected to accelerate in
fiscal 2015 and grow by 3.6 percent, driven primarily
by transfer payments in nondiscretionary programs,
including ACA subsidies for purchasing health insurance, continued Medicaid expansion, and Social Security payments to retiring baby boomers. As a result,
the deficit will shrink more slowly as a share of GDP,
declining to 3.1 percent in fiscal 2015 and 2.9 percent
in fiscal 2016.
The 2015–2016 Outlook
Real GDP growth starts 2015 off at a modest 2.1 percent pace, reflecting some drag from a cold winter.
By mid-2015, growth ramps up to exceed a 3 percent
pace, reflecting accelerating consumption growth, solidifying residential construction activity, and a finallygrowing government sector. During 2016, however,
a drag from net exports increases, bringing the quarterly growth rate under the 3 percent mark by the end
of the year.
The housing sector is expected to become a significant contributor to growth over the next two years, as
higher prices eventually induce more residential construction. Annual housing starts grow from 1 million
units in 2014 to 1.16 million units in 2015, and then
pick up to 1.36 million units in 2016.
Light vehicle sales are projected to reach 16.9 million
units in 2015 and 17.2 million in 2016, mostly on the
back of strong truck sales (pickups, crossovers, minivans and SUVs). In 2016, vehicle sales are projected
to be the highest since 2000, another period of cheap
gasoline and rising truck popularity.
Employment and Inflation
The economy is projected to add 3.1 million jobs in
2015, slightly more than during 2014, making 2015
the best year for job creation since 1999. Average
monthly employment gains peak at 294,000 jobs this
quarter before sliding to 209,000 by the end of next
year. The unemployment rate continues to decline,
falling to 5.1 percent by the end of 2015 and reaching
4.8 percent by the end of 2016.
Cheap gas and a strong dollar work in concert to restrain consumer price inflation in 2015. Headline inflation is expected to come in far below core inflation
at a mere 0.1 percent, before running ahead in 2016
as crude oil (and by extension gasoline) prices partially recover. Core inflation edges lower in 2015 to
1.6 percent, before picking up in 2016 to 1.8 percent.
Headline CPI inflation reaches 2.0 percent for 2016.
Actual
RSQE Forecast
2013
2014
2015
2016
GDP (billions of current $)
16768.1
17418.3
18101.4
18962.9
Real GDP (billions of chained 2005 $)
% change: year-over-year
% change: 4th-qtr-to-4th-qtr
15710.3
2.2
3.1
16085.3
2.4
2.4
16558.1
2.9
2.8
17084.2
3.2
3.1
136.4
7.4
78.0
139.0
6.2
79.1
142.2
5.3
79.9
144.9
5.0
80.9
1.4
1.5
1.8
1.4
1.6
1.7
0.4
0.1
1.6
1.6
2.0
1.8
15.5
929.8
16.4
1001.3
16.9
1156.4
17.2
1362.2
0.1
2.4
4.0
0.0
2.5
4.2
0.3
2.3
4.0
1.2
2.8
4.5
11650.8
-0.2
1761.1
11940.4
2.5
1839.8
12410.7
3.9
1863.7
12832.0
3.4
1905.3
Value of U.S. $ (FRB broad index), % appreciation
Current account balance (NIPA basis, billions of current $)
1.2
-422.2
3.1
-461.3
11.0
-423.6
1.3
-501.0
Federal surplus (FY, NIPA basis, billions of current $)
-775.0
-577.3
-561.7
-541.2
Nonfarm payroll employment (millions)
Civilian unemployment rate (%)
Capacity utilization, total industry (%)
Inflation (private nonfarm GDP deflator, % change)
Inflation (CPI-U, % change)
Inflation (core CPI, % change)
Light vehicle sales (millions)
Private housing starts (thousands)
3-month Treasury bill rate (%)
10-year Treasury note rate (%)
Conventional mortgage rate (%)
Real disposable income (billions of chained 2005 $)
% change
Corporate profits after tax (billions of current $)