The brutal winter of 2014 with its multiple blasts of cold weather certainly put large sections of the U.S. in a deep freeze, but will it have a similar, lasting effect on the U.S. economy? Business economists don't seem to think so, according to the Outlook Survey released this week by the National Association of Business Economics (NABE), which represents the consensus from 48 professional business economics forecasters.
In a similar survey taken in December 2013, the economy was projected to grow at a 2.5% clip. The growth estimates in the March 2014 survey have been raised to 2.8% for 2014, with a continued increase to 3.1% in 2015. Given the economic growth rate of 1.8% in 2013, the survey reflects cautiously increasing optimism among most economists.
It isn't that the winter of 2013-2014 didn't affect the economy. Original estimates of the effect of the first polar vortex were in the range of a 0.1-0.2% drop in GDP for the first quarter of 2014, with the recent survey respondents revising the expected drop to 0.4-0.5%. However, the first predictions expected the economy to rebound in the second quarter, and that rebound is still anticipated by the survey respondents.
Labor projections play some role in the optimism, as survey respondents project non-farm employment numbers to rise – albeit at a relatively slow pace. The anticipated average monthly gain is 188,000 jobs throughout 2014, a bit below the 2013 monthly level of 194,000 jobs. Even so, the unemployment rate for 2014 is expected to drop to a 6.4% average, compared to a 7.4% average in 2013.
Banking on continued acceleration of the economy, the respondents expect even stronger job creation in 2015, with an average monthly increase of 205,000 jobs expected, and a continued decline in the unemployment rate to 6.1%.
The major driver behind optimism is the expected actions of the Federal Reserve. At her news conference earlier in March, the new Fed Chairwoman Janet Yellen announced the continuation of tapering Fed bond purchases by $10 billion per month, thus reaffirming no radical departures in Fed policy.
The majority of survey respondents expect the current stimulus policy to continue, and possibly accelerate, leading to the end of the bond-buying stimulus in the early 3rd or 4th quarter of 2014. Only 17% of the respondents expect the program to continue into 2015 or beyond.
The greatest wild card appears to be interest rates. Over 33% of the survey respondents expect the federal funds rate to increase. Here the Fed strategy is less clear, thanks to Yellen's comments that after the bond-buying stimulus program ended, short-term interest rates could be raised within six months.
This apparently removed the previous benchmark of 6.5% unemployment rate as the point where the Fed would declare the economy strong enough to withstand interest rate increases. Temporarily, this puts a metaphorical stick in the bicycle spokes on Wall Street, as investors struggle to determine when interest rates really will rise.
The interest rate outlook was further muddied by comments today (March 25) from Charles Plosser, President of the Federal Reserve Bank of Philadelphia. “I don’t think the Fed changed its position,” he said. “In fact, it tried to say very explicitly in its statement that we believe forward guidance or the expectations have not changed as far as we're concerned."
The NABE respondents are taking the longer view on interest rates, reflecting the reality that rates have to raise from their near-zero level at some point. They expect the Fed to manage the rise cautiously, and thus manage the economy wisely.
Certainly, other events can derail optimism — for example, we have plenty of geopolitical concerns that could drive up energy prices, including Russia’s annexation of Crimea, and the economic effect of the Affordable CAre Act (aka Obamacare), either positive or negative, remains to be seen. Nevertheless, most business economists remain optimistic.
Let's hope they are right.
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