2015Q1 Forecasts for the Philadelphia Federal Reserve Society

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.

RCF Economic Update and Forecast – April 2015

We expect the Fed to raise rates in the third quarter though the rate lift-off may be further delayed if the economy is slow to rebound from what we believe is a temporary lull. In any case, we expect fed funds rate increases to be slower and more modest than in the past.

RCF’s latest publication, Economic Update and Forecast for April 2015 is available for download:

icon RCF_Economic_Update_and_Forecast_April_2015.pdf (601 KB)

QUICK LOOKS:

• The economy slowed in the first quarter as lower oil prices and a strong dollar hit the energy sector, exports, and job creation.

• A key positive has been increases in labor earnings and household savings which we believe will eventually lead to stronger consumer spending.

• We expect the Fed to raise rates in the third quarter though the rate lift-off may be further delayed if the economy is slow to rebound from what we believe is a temporary lull. In any case, we expect fed funds rate increases to be slower and more modest than in the past.