US Economy Forecast 2014, 2015

Till SchreiberSenior Lecturer ProfessorCollege of William & Mary

September 26th 2014Nafa Annual Convention, Aspen, CO

Looking back to Savannah

• My forecast a year ago:– Slow (below long-term average) growth in 2014– Unemployment falls slowly– Disappointing recovery continues– Government muddling through instead of

implementing pro-growth policies• Unfortunately, this turned out to be about

right

Realistic forecast must make assumptions about some factors

• No ideological agenda• Based on current and historical data, facts

(and some theory)

• Where is the economy now?• What do some leading indicators suggest

about the near future?

Snapshot of the economy• Unemployment rate 6.2% (ticked up recently)– Labor force participation still really low

• GDP growth disappointing– FELL 2.1% in first quarter (at annual rate), then went up by

4.2% second quarter• Economy slowed down by multiple “headwinds”– Cold winter in first part of the year – Government deadlock– Slowdown in Europe and emerging markets

• Inflation expected to be about 2% each year going forward over the next decade (based on bond yields)

Will the jobs/workers come back?

Share of workers claiming social security disability (Mueller et al, 2013)

Government regulation• How much does ‘too much regulation’ reduce

growth?– Talk of secular stagnation, permanently lower

growth– Can US economy return to 20th century trend

growth?• Immigration• Not just you. Talk to Virginia Credit Union

League some month ago, very similar issues• Assume: No reduction in red tape imminent

Investment, Investment, Investment

• Main issue of disappointing “recovery”– Private sector investment (spending by businesses

on R&D, new machines etc.) fell of a cliff in late 2008, early 2009

– It has recovered somewhat, will it now continue to increase or flatten out?

Investment as share of GDP (blue) vs. Unemployment rate (red)

Business Sector

• You guys!• High levels of uncertainty – Regulations and Taxes– Consumer and Industry demand going forward

• Purchasing Managers’ Index (ISM)– High last summer/fall. Then big fall in early 2014, now

has regained the ground. Temporary blip or beginning of faster recovery???

• Assume: Resilient investment demand, total construction spending up over last year

Exports

• Questions about growth prospects in emerging markets– Dollar has recently appreciated versus many

emerging market currencies• Eurozone faces internal issues, so does Japan• No export boom likely overall

What to make of all this?• Growth in the second half of 2014 will likely be

around 3%. But don’t be too optimistic (see below)

Forecast for 2015

• Growth should pick up once the recovery really takes hold– Has been predicted since late 2009, many businesses

and households have now paid down debt substantially• Crucial market: Investment! Both residential

(housing) and other fixed investment• No government policies in sight to address

regulation mess boldly– Muddling through continues

Forecast for 2015

• If economy grows fast, interest rate hikes may slow down recovery of housing market and investment generally somewhat– Federal Reserve scheduled to raise rates next year

• “Disappointing” economy may continue• Growth of 3% unlikely to be topped next year• Unemployment comes down further very, very

slowly if at all