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The U.S. economy is really improving – really – and when a Federal Reserve official uses words such as “gangbusters,” “a lot of good news,” “pretty darn good second half” and “very, very positive sign,” all add up to a growth story this year and in 2015. The median of 19 forecasts from the Fed – a tight range of forecasts – calls for a gross domestic product (GDP) increase of 3.0 percent this year; 3.1 percent next year; and 2.9 percent in 2016. “There is enough positive news to at least be comfortably, modestly optimistic,” David Altig, executive vice president and director of research for the Federal Reserve Bank of Atlanta, said at the 2014 Economic Outlook Conference. He said the 2014 forecast “is much, much better than what we’ve seen all through the recovery with the exception of the beginning from the very depth of the recession.” Although the projected GDP increase seems sluggish compared with previous recoveries, Altig said that “it takes many, many years to recover from a crisis that is fundamentally about a breakdown of the financial system.” He said that a couple of economists concluded that it takes 10 years to recover from a financial crisis, but the U.S. is on pace to recover in five to eight years. The GDP recovery “has been much more rapid than you would expect from looking at historical (equivalents),” Altig said. “It’s a long, painful recovery period – not the type we’re used to.”

The Fed forecast of 3.0 percent growth this year is more upbeat than the 2.6 percent GDP increase this year from IHS Global Insight, one of the country’s foremost forecasting firms. IHS is also forecasting GDP growth of 3.1 percent in 2015. Other 2014 forecasts from IHS Global Insight: > Consumer spending will increase 2.5 percent. > Residential investment will jump 14.8 percent. > Exports will rise 4.5 percent. > Industrial production will increase 2.9 percent. > State and local government will increase 0.2 percent. > Commercial and health care structures will increase 6.9 percent. All of those indicators are increases from 2013 and most are forecast to increase in 2015, with commercial and health structures projected to grow 18.5 percent; exports rising 5.6 percent; and residential investment jumping 16.2 percent in 2015. Meanwhile, the International Monetary Fund (IMF) is forecasting global GDP growth of 3.6 percent in 2014, which is a big jump from 2.9 percent in 2012. The IMF is projecting Mexico’s GDP to increase 3.0 percent from 1.2 percent in 2013 and for a 1.0 percent GDP growth in the Euro area after GDP was -0.4 percent in 2013. Those GDP increases are important because they are the country’s largest export destinations, according to Altig. The World Bank has upgraded its global forecast to 3.2 percent in 2014 and that’s important because the organization pointed to the U.S. “We drive the world economy, and the world economy being driven rebounds to us in a positive way,” Altig said.


Montgomery Business Journal March 2014

Other reasons for the Fed’s positive economic outlook include the expectation that fiscal drag won’t be a factor – less uncertainty in Washington. The economic policy uncertainty index is back to pre-recession levels. Policy uncertainty “is not gone, but it is significantly diminished …” Altig said. The indicator for new orders, a forwardlooking metric for business investment spending “has been quite robust,” according to Altig, and topping 60 percent when 50 means expansion. The increased housing values and stock prices are supporting consumer spending. Household net worth has recaptured all the money lost during the Great Recession and now stands at an all-time high of nearly $80 trillion. Of course, there are some concerns, including personal income, which is forecast to lag consumer spending. Another area is the falling labor participation rate because of demographics. Close to half of the 12 million people who dropped out of the labor force since 2007 retired because of the aging work force and “it’s not going to reverse itself,” Altig said. He said the country historically imports labor when there is a shortage. The Fed is very concerned about the low inflation rate. The Fed target rate is 2.0 percent and the IHS Global Insight forecast is an inflation rate of just 1.5 percent this year and 1.6 percent in 2015. The inflation rate was 1.5 percent last year. Altig said he expects the inflation rate to remain low “for some time.” That coupled with “sketchy” labor market conditions means the Fed will continue to stimulate the economy with lowinterest rates. He called the second half of 2013 “pretty spectacular” and expected the final GDP for 2013 to be near 3 percent. The fourth quarter GDP should be about 4.0 percent, Altig said. It was such a strong quarter that Macroeconomic Advisors adjusted its fourthquarter forecast from 1.5 percent GDP to 3.9 percent. •

Profile for Montgomery Area Chamber of Commerce

Montgomery Business Journal – March 2014  

Montgomery Business Journal – March 2014