2015Q1 Forecasts for the Philadelphia Federal Reserve Society of Professional Forecasters
RCF Vice-President Peter Bernstein is a member of the Philadelphia Fed’s Society of Professional Forecasts. Here are the 2015Q1 forecasts he submitted in February, along with a look at his 2014Q4 forecasts and recent historical data.
Lower Gas Prices Finally Boosting Economy
The substantial decline in gasoline prices over the past six months is finally starting to show positive benefits for the economy. While consumer spending in recent months has actually been down, that is entirely due to lower spending on gasoline. Other spending has risen and the household savings rate reached its highest level in two years. Factoring in the decline in prices, real consumer spending in January was 3.4 percent greater than a year earlier while real after-tax income rose 4.2 percent. With employment continuing to grow and wages starting to edge up, it looks like consumers will be the key driver of the economy in 2015.
That is the good news. The bad news is that stronger dollar is starting to hurt U.S. exports and taking some of the steam away from the recovery in U.S. manufacturing. Still, the positives should outweigh the negatives pushing the economy to above 3.0 percent full-year growth for the first time since before the Great Recession. We expect the Fed to raise rates this year but it is unclear whether the liftoff will occur mid-year, as we have been thinking, or later in the year. While U.S. economic conditions no longer warrant the Fed’s zero interest rate policy, there is a legitimate concern that higher rates in the U.S. combined with rate cuts in many other countries would send the dollar even higher, further weakening U.S. exports. Another factor keeping the lid on rates is low inflation; even excluding the drop in energy prices, “core” inflation is below the Fed’s 2.0 percent target. Therefore, we think the key determinants of the timing of the rate increase will be data on core inflation and wage growth.