2016Q3 Forecasts for the Philadelphia Federal Reserve Society

RCF Vice-President Peter Bernstein is a member of the Philadelphia Fed’s Society of Professional Forecasters. Below are his 2016Q3 forecasts and analysis, as well as a look at his 2016Q2 forecasts and recent historical data.

Consumer Spending Keeps Economy Growing

Real GDP grew at only about a 1.0 percent annual rate through the first-half of 2016, even less than the modest 2.0 percent growth that has been typical of the past few years. The weaker growth was due to a decline in business investment spending. Business investment spending fell in part because of a temporary reduction in inventories, but mainly because of a slowdown in the manufacturing sector due to a sluggish global economy, a strong dollar, and continued weakness in U.S. oil production.

Consumer spending on the other hand was particularly strong, especially in the second quarter of 2016 when it rose at a 4.2 percent annual rate. Solid job growth (1.1 million jobs added in the first-half of 2016) and modestly rising wages (up 2.6 percent vs. last year) have been the key. But with this increase in wages and consumer spending, there has been a notable uptick in inflation. In fact, the increase in inflation explains much of the smaller increase in real GDP.

In the near-term, higher inflation might actually be a good sign because it indicates that consumers are willing and able to pay higher prices. But eventually, higher inflation could put the Fed in a quandary. Rising prices might force the Fed to increase interest rates even at a time when slow growth and an uncertain international situation argue against a rate hike. For now, we expect the Fed to hold off on any rate increase until December.

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