Monthly Economic Outlook by Scott J. Brown, Ph.D.
Jobs and growth: Diminished expectations
June 6, 2016
- Nonfarm payrolls rose more slowly in the three months ending in May, which may reflect noisy data. However, job gains will slow as the labor market tightens, and future labor force growth will be a lot slower than in previous decades.
- U.S. economic growth is likely to be moderately strong in the near term, led by consumer spending, but restrained by continued subpar global growth and cautious business investment.
- The Fed’s policy outlook is geared on tighter labor market conditions and a desire to normalize policy over time. However, asymmetric risks, global concerns, and business caution should keep short-term interest rates on a gradual path.
Back in the Sweet Spot?
April 21, 2016
- Recent economic data reports have been generally soft, suggesting relatively weak GDP growth in the first quarter. However, the data are also consistent with moderate growth in the near term – not strong, but not terribly weak either.
- Following signs of a pickup in core inflation in January and February, March inflation figures were more benign. Combined with the moderate growth outlook, the Fed’s gradual path of policy normalization should be even more gradual.
- Much of the fear that was rampant at the start of the year (China, Fed tightening, a too-strong dollar, a possibility of “recession”) has subsided. As in the last few years, the economic expansion is expected to continue, but not so fast that the Fed rushes to take away the punch bowl
March 7, 2016
- The consumer outlook remains positive, driven by job gains, wage growth, and a further decline in gasoline prices. Consumers are concerned about the overall economy, but generally feel better about their own financial situation.
- Businesses remain mostly cautious amid concernss about global growth, fear of “recession,” and election-year uncertainty. Foreign trade and an inventory correction are likely to be moderate drags on GDP growth in the near term.
- The Fed remains in tightening mode, but recent financial market developments should keep monetary policy on hold in the near term. A June hike is likely to be on the table, but the decision to move will remain data-dependent.
Front-Loading Anxiety and Risk in 2016
January 13, 2015
- China’s stock market troubles have fanned concerns about the strength of the country’s economy and the ability of Chinese authorities to stabilize the situation. However, the bigger concern is the yuan, which is under considerable pressure
- The U.S. economic data have been mixed, with signs of somewhat slower GDP growth, but continued strength in jobs.
- The Fed is still expected to raise short-term interest rates further, but global disruptions are likely to lead officials to delay the second rate hike beyond March.
The 2016 economic outlook (Briefly)
December 17, 2015
- The theme of domestic strength and global weakness is expected to remain prevalent into the first half of the year. Job growth is expected to remain strong, but likely slower than in the last two years. The benefit to consumer spending from lower gasoline prices should fade as energy prices stabilize.
- The global outlook will be important. The advanced economies are expected to grow moderately, while emerging economies should be mixed. The Chinese currency is likely to depreciate a lot more, but gradually over the course of 2016.
- The Fed is expected to raise rates gradually (25 basis points at every other policy meeting), but policy action will be data- dependent and the risks are that it will be less aggressive.
Fed Set to Begin Normalization
November 19, 2015
- U.S. economic activity has appeared mixed, but generally moderate into 4Q15, with a strong (but somewhat slower) trend in job growth and low inflation.
- Downside risks (to the U.S. economy) from the rest of the world appear less worrisome than a couple of months ago.
- Federal Reserve officials have signaled a strong likelihood that short-term interest rates will be raised in December. More importantly, while further policy tightening will be datadependent, the pace of rate increases is expected to be gradual.
October 7, 2015
- The slowdown in global growth and the stronger dollar have restrained U.S. exports. A wider trade deficit and an inventory correction are expected to subtract from GDP growth.
- In contrast, consumer spending growth appears to have remained brisk, factory shipments of capital goods have improved, and the housing sector continues to recover.
- Since postponing the initial increase in short-term rates in mid-September, most Fed officials (including Chair Yellen) have indicated that a rate hike is likely to be warranted by the end of the year. The markets believe the Fed will wait until 2016.
Fed Delays / Government Shutdown Looms
September 22, 2015
- Global financial and economic developments are expected to have a mixed, but uncertain, impact on the U.S. economy. The Federal Reserve is still set to raise short-term interest rate. Officials appear to be mixed, but are generally cautious.
- Slower global growth and an inventory correction may restrain GDP growth, but domestic demand should benefit from lower commodity prices and is expected to remain strong.
- Showdowns over the FY16 budget and the debt ceiling may lead to a government shutdown. While a shutdown would likely have a limited impact on the economy, it could add to financial market anxieties in the weeks ahead.
August 25, 2015
- Fears of slower growth in China and other emerging economies have added to investor anxieties around the world.
- While U.S. exporters will face restraints from slower growth abroad, lower commodity prices should be beneficial for consumers and domestic-oriented businesses.
- The Fed remains on track to begin raising short-term interest rates, but downward pressure on commodity prices and the lack of a meaningful pickup in wage growth is likely to lead the Fed to delay policy action the near term.
Second-, Third-, and Fourth-Guessing the Fed
July 23, 2015
- An agreement between Greece and the European Commission has reduced the odds of a near-term exit from the monetary union. However, the country's situation is unresolved and we are likely to see tensions heat up again at some point.
- Federal Reserve officials continue to signal that economic conditions are likely to warrant an initial increase in short-term interest rate this year, but they have also emphasized that the more important question is the pace of tightening beyond the first move - and that pace is expected to be gradual.
- While Greece is mostly off the table as a near-term risk, U.S. investors are likely to remain concerned about a variety of other issues, including the timing of Fed rate hikes and a possible longer-term slowdown in China.
Fed on track for policy normalization
June 23, 2015
- Economic data have been consistent with moderate growth in 2Q15, but with mixed strength across sectors.
- Excess slack in the labor market continues to be reduced, but full employment still appears to be many months away.
- Monetary policy will remain data-dependent. It’s likely the Fed will begin raising short-term interest rates later this year, but the pace of tightening is likely to be very gradual.
Yikes! (but mediocre news may be “good” news)
May 13, 2015
- GDP growth was weak in 1Q15. More importantly, the anticipated 2Q rebound appears likely to disappoint.
- The economic backdrop may be favorable for equities. The economy continues to recover but not so rapidly that the Fed will rush to take away the punch bowl.
- However, earnings growth remains an issue for the stock market and a sharp increase in bond yields in Europe has contributed to a similar rise in yields of long-term Treasuries.
Still optimistic, but some uncertainties
April 24, 2015
- Growth slowed in the first quarter, reflecting bad weather, West Coast port issues, a contraction in energy exploration, and the impact of a strong dollar, but is widely expected to pick up.
- Senior Fed officials continue to suggest that conditions are likely to warrant an initial increase in short-term interest rates this year. However, they also believe that the more important question is the pace of tightening after the first hike, and they suggest that that pace is likely to be very gradual.
- Financial market participants face uncertainty regarding the pace of economic growth here and abroad, as well as Fed policy changes, geopolitical worries, and other issues.
The fed, U.S. dollar, and markets
March 10, 2015
- The Federal Open Market Committee is widely expected to alter its language in the March 18 policy statement, abandoning the view that it can "be patient" in deciding when to begin raising short-term interest rates. However, that does not mean that the Fed will raise rates anytime soon.
- The Fed will have to raise rates eventually. In contrast, other central banks are battling the possibility of deflation. Monetary policy is the major factor in short-term movements in exchange rates. The dollar is likely to strengthen further in the near term.
- The strong dollar is a plus for consumers, but a negative for exporters. There are two opposing forces at work on bonds: worries about the rest of the world, which are keeping yields down, and increasing domestic economic strength, which would normally be pushing bond yields higher.
USA! USA! USA!
January 22, 2015
- U.S. economic growth should pick up in 2015, as lower gasoline prices are expected to provide significant support for consumer spending. Importantly, the expansion is now characterized by an improving outlook for small and mediumsized businesses, which should continue to propel economic growth even after gasoline prices stop falling.
- The outlook for other advanced economies has softened further and emerging economies are likely to be a bit spotty in 2015. The U.S. dollar should continue to strengthen and a flight to quality is expected to keep long-term interest rates low.
- The Federal Reserve is expected to begin normalizing monetary policy in the second half of the year. However, shifting views on the Fed’s timing outlook, economic developments outside the U.S., and geopolitical tensions are likely to keep financial market volatility at elevated levels.
The 2015 Outlook - Many Moving Parts
December 18, 2014
- What’s going on in the rest of the world will be a key factor for investors in 2015. Soft global growth is expected to have a mixed impact on the U.S. economy. There is some risk of increased geopolitical tensions and financial disruptions.
- A sustained decline in crude oil prices will have a negative impact on the U.S. energy sector, but lower gasoline prices should provide significant positive benefits to consumers and businesses.
- The Federal Reserve is expected to begin normalizing monetary policy. Managing financial market expectations is likely to prove one of the biggest challenges in 2015.
Eyeing U.S. Growth and the Outlook Abroad
November 21, 2014
- U.S. economic growth appears mixed, but moderate. Lower gasoline prices are expected to help offset the impact of lackluster wage growth into early 2015.
- Global developments will remain important. In recent weeks, U.S. investors have reacted negatively to signs of economic weakness in the euro area, China, and Japan, but positively to increased central bank efforts to spur growth.
- Having ended large-scale asset purchase, the focus shifts to when the Fed will begin raising short-term interest rates. That decision will be data-dependent, but there’s no clear consensus.
The Fed Policy Outlook
August 28, 2014
- Real GDP growth is expected to expand at a moderately strong pace in the remainder of 2014, while inflation is likely to trend below the Federal Reserve’s target.
- Economic weakness in Europe has put downward pressure on global bond yields. Geopolitical tensions are expected to remain an important factor for investors.
- The FOMC is on track to end its asset purchase program (QE3) after the October 29 policy meeting. The first increase in short-term interest rates will depend on the economic data, but rates are unlikely to be raised until around mid-2015. Officials are making progress on policy normalization plans
The 2H14 Outlook
July 22, 2014
- Real GDP growth is expected to expand at a moderately strong pace in the second half of 2014, reflecting diminished headwinds, but the pace may disappoint somewhat.
- Chief concerns are the lack of growth in real average wages and increased geopolitical tensions. In addition, lawmakers and the central bank will have limited scope for stimulative polices if needed (in the face of a large negative shock).
- The Federal Open Market Committee will continue to reduce the monthly pace of asset purchases, ending after the October 29 policy meeting. Officials are currently debating the mechanics of policy normalization. However, short-term interest rates are unlikely to be raised until mid-2015.
U.S. Economy Improving / Rest of World Not So Much
June 11, 2014
- Real GDP growth is expected to pick up significantly following a contraction in 1Q14, with further improvement in overall labor market conditions. The housing recovery and global growth have been key disappointments this year.
- Long-term interest rates are lower than they were expected to be, reflecting slower global growth, expansionary policies of foreign central banks, and expectations that the Fed won’t be in much of a hurry to raise short-term interest rates.
- Fed officials are currently debating the initial steps they will take to reduce policy accommodation. However, short-term interest rates are unlikely to be raised until mid-2015.
Distorted Data, Global Gloom
May 16, 2014
- Following near flat GDP growth in 1Q14, the pace of the recovery is expected to rebound sharply in 2Q14. However, growth for the first half of the year as a whole is likely to be disappointing relative to earlier expectations. Economic data reports have been distorted by adverse weather, the rebound from adverse weather, and the late Easter holiday.
- Fed Chair Yellen highlighted two major risks to the outlook: developments abroad and a prolonged slowing in housing.
- The tapering of QE3 is expected to continue “in measured steps” ending in 4Q14. The timing of the first increase in short- term interest rates is uncertain, but if the economy improves as anticipated, June 2015 seems likely.
April 23, 2014
- Adverse weather had a negative effect on economic activity in the first quarter. We should see a rebound in most economic series in 2Q14. It will likely be difficult to gauge the underlying strength, but investors are likely to remain optimistic about growth prospects for the remainder of the year.
- Globally, the advanced economies are expected to improve, but growth in emerging economies may remain spotty. In the U.S., economic activity has varied across the income scale.
- Federal Reserve policymakers are expected to continue along the current taper path, reducing the monthly pace of asset purchases by $10 billion at each FOMC meeting. The Fed is not expected to begin raising short-term interest rates until about the middle of 2015 (and then only gradually).
Still an Optimistic Outlook
March 26, 2014
- Adverse weather has had a negative impact on growth in early 2014, but the underlying trend is likely to have been a bit lackluster regardless. Data reports for the spring and early summer should show a rebound from poor weather, making the economy appear stronger than the underlying trend.
- Federal Reserve policymakers have continued along the expected taper path. The language in the forward guidance (on short-term interest rates) has changed, but the monetary policy outlook is essentially the same as it was at the end of 2013.
- Concerns about emerging economies have not gone away. Fallout from Russia’s annexation of Crimea and continued uncertainties about the Chinese economy bear watching.
Poor Weather, Revisions, and Continued Optimism
February 25, 2014
- One should always be careful in interpreting the economic data for the winter months. Seasonal adjustment can magnify the impact of adverse weather. The bigger test for jobs, consumer spending, and housing will come in the spring.
- While financial market participants have come to accept the weather distortions, much of the economic data for the fourth quarter have been revised to show less momentum at the end of the year, and implicitly somewhat slower growth in early 2014.
- Janet Yellen has stressed continuity at the Fed. While the tapering of asset purchases is “not on a preset course,” officials expect further reductions “at a measured pace” at future policy meetings (read that as -$10 billion per FOMC meeting). It would take a material change in the outlook for the Fed to alter that path, and the outlook for 2014 remains positive.
The Economy in 2014
December 20, 2013
- With headwinds fading, U.S. economic growth is expected to pick up over the course of 2014 and into 2015. Federal fiscal policy, the major economic headwind in 2013, will be much less of a drag in 2014, while state and local government should make a moderate contribution to growth.
- While the economy has continued to rebound from a severe recession, it’s far from fully recovered. The large degree of slack should allow the economy to expand more rapidly, without a significant threat of higher inflation.
- The Federal Reserve will taper its monthly asset purchases in “measured steps” in 2014, with the pace to be dictated by the economic data. The Fed will continue to support growth through its forward guidance on short-term interest rates. Long-term interest rates should trend gradually higher as the economy recovers, but expect some volatility along the way.
Fed Policy – Boxed In, But For How Long?
November 22, 2013
- Minutes of the October 29-30 Federal Open Market Committee showed that officials expected to taper “in coming months,” but there was disagreement about when and how the Fed would communicate its intentions.
- The rise in long-term interest rates, if due to a misinterpretation of the Fed’s intentions, is unwelcome. The commitment to keep short-term interest rates low should prevent long-term interest rates from rising too rapidly.
- The change in Fed leadership should be seamless. Janet Yellen has had a strong hand in the Fed’s policies. However, the Fed will face a number of challenges as it begins to normalize.
Fiscal and Monetary Policies in Different Directions
October 31, 2013
- The partial government shutdown and debt ceiling crisis are expected to have had a negative, but temporary, impact on economic growth. Still, the underlying pace of GDP growth in 2H14 is likely to be disappointing relative to earlier expectations.
- While another government shutdown in early 2014 is possible, it is also unlikely. Lawmakers of both parties will work toward limiting the sequester cuts that are set for mid-January.
- Federal Reserve officials have left the door open for a possible reduction in the pace of asset purchases at the December policy meeting. The tapering decision will depend on the economic data, as well as financial conditions.
The Fed Buys Itself Some Time
September 19, 2013
- Recent economic data reports have remained mixed, but have been consistent with moderate growth in 2H13.
- While the economic outlook has evolved broadly in line with earlier expectations, Federal Reserve policymakers “decided to await more evidence that progress will be sustained before adjusting the pace of its asset purchases.”
- Fed officials were concerned about “the rapid tightening” in financial conditions in recent months and saw upcoming fiscal policy debates as a downside risk to growth.
Tip-Toeing to Taper Town
August 27, 2013
- Recent economic data reports have been mixed, but consistent with moderate growth in 2H13.
- The Federal Reserve is widely expected to begin reducing its monthly pace of asset purchases by the end of the year. The decision when to start tapering will be data-dependent. Financial markets should have mostly factored in the tapering. Talk of tapering has led to capital outflows from emerging economies.
- The financial markets have focused too much on Fed tapering. A showdown over the federal budget and debt ceiling has the potential to be much more unsettling.
The End of QE3 Is Not the End of Fed Accommodation
July 16, 2013
- Recent economic data reports have been mixed, but consistent with relatively weak GDP growth in 2Q13. The upcoming comprehensive benchmark revisions to the GDP data may generate some confusion for the markets.
- The Federal Reserve is expected to taper the pace of asset purchases later this year and end the program in mid-2014, but that will depend on the economic data. More importantly, the federal funds target rate is not expected to start rising until 2015.
- Long-term interest rates have risen for two reasons. There has been some misinterpretation of the Fed’s policy intentions. In addition, the bond market’s risk perceptions have undergone a considerably adjustment. Long-term interest rates should rise gradually over the next few years as the economy recovers, but we can expect to see some volatility along the way.
The Outlook for the LSAP (QE3) and What That Means
June 13, 2013
- Recent economic data reports have been consistent with a lackluster-to-moderate pace of growth in 2Q13.
- The Federal Reserve is expected to keep the target for the overnight lending rate unchanged until about mid-2015.
- Fed officials are discussing whether to dial down the rate of asset purchases. Some technical adjustment in the monthly pace may be appropriate. However, it’s the total amount of securities purchased that matters and even a full stop in QE3 would not be a removal of policy accommodation.
Moderate Growth in 2Q13, Better in the Second Half
May 20, 2013
- Recent economic data reports have been mixed, consistent with a moderate pace of growth in the near term.
- Job growth, while a bit uneven in recent months, has trended at a moderately strong pace – still far short of the “substantial improvement” that Federal Reserve officials are looking for.
- The Fed is still a long way from raising short-term interest rates. The current debate is about when to begin tapering the pace of asset purchases. Fed officials are uncomfortable with the asset purchase program, but the majority believes it has played an important role in the economic recovery.
Better Than Expected 1Q, Then a 2Q Moderation
April 9, 2013
- Recent data suggest that 1Q13 GDP growth was stronger than anticipated at the start of the year. However, growth is expected to moderate significantly in 2Q13.
- Job growth, while a bit uneven in 1Q13, has trended at a moderately strong pace – still far short of the “substantial improvement” that Federal Reserve officials are looking for.
- While the Fed could alter the pace of its asset purchases in the months ahead, no change is anticipated in the near term. Aggressive monetary easing in Japan and renewed concerns about Europe will also help keep long-term interest rates low.
A Mixed End to 2012, Further Budget Issues Ahead
February 8, 2013
- Real GDP ended 2012 on a weak note, reflecting a drop in defense spending and a slower rate of inventory accumulation. Job growth remained relatively strong into early 2013.
- The rise in payroll taxesshould dampen consumerspending growth in the first half of this year, but economic growth is expected to pick up in the remainder ofthe year
- Monetary policy is likely to remain very accommodative. Fiscal policy is more uncertainty. Large spending cuts, delayed to March 1,may be postponed further.
Beyond the Cliff and Through the Ceiling
January 15, 2013
- Congress avoided most of the fiscal policy restraint in the fiscal cliff, but failed to prevent a rise in the payroll tax, did little to reduce the long-term federal budget deficit, and did not address the federal debt ceiling.
- One way or another, the debt ceiling will be raised, leaving investors to focus on the fundamentals of the economic recovery.
- The rise in payroll taxes will dampen consumer spending growth to some extent and cuts in federal spending should restrain overall output in the first half of the year. However, headwinds are expected to continue to fade and tailwinds should pick up in the second half of the year and into 2014.
Special Economic Brief
Economic Brief – The Budget Deal?
January 2, 2013
- The House (by a vote of 257-167) and the Senate (by a vote of 89-9) approved the Senate’s plan to avoid most of the fiscal cliff. The president is expected to sign the bill into law.
- The plan would raise taxes on upper income households, provide a permanent fix to the Alternative Minimum Tax, and postpone spending cuts for two months. It does not prevent a 2% increase in payroll taxes, which will have a significant impact on consumer spending growth in the near term, nor does it address the federal debt ceiling.
- The deal sets up further confrontation over spending cuts, the debt ceiling, and the longer-term budget outlook.
2013 Outlook: Life Beyond The Fiscal Cliff
December 13, 2012
- The fiscal cliff is a major uncertainty in the economic outlook. However, we’re likely to see some resolution one way or another, if not by the end of 2012, then in early 2013.
- With at least some fiscal tightening expected, economic growth should be slower in the first half of the year, but more robust in the second half and into 2014.
- Economic headwinds should ease somewhat in 2013, while tailwinds are likely pick up over time.
Fiscal Cliff Diving
November 8, 2012
- The 2012 election is now behind us. Leadership in Washington remains unchanged. Barack Obama will be president for another four years. Republicans retain control of the House and the Democrats remain in control of the Senate.
- With one uncertainty resolved for the financial markets, another looms large: the fiscal cliff. A renewed spirit of bipartisanship is unlikely and negotiations to reduce the impact could get entangled with efforts to raise the debt ceiling.
- The economic recovery appears poised to pick up momentum in 2013, but the fiscal cliff is likely to be a restraint.
Some Job Market Gains, But Uncertainty Remains
October 11, 2012
- Recent economic reports continue to suggest a lackluster- to-moderate pace of growth in the near term.
- The recovery is still on track, restrained by a number of headwinds. Monetary policy will remain supportive, but fiscal policy is expected to be a moderate drag.
- Job growth appears to be a bit more than is needed to keep pace with the growth in the population, but is nowhere near enough to make up for the ground lost during the downturn.
The Fed Does What It Can
September 18, 2012
- Recent economic figures have remained mixed, consistent with a moderate pace of growth in the near term.
- The recovery is expected to continue, but faces a number of headwinds and some significant downside risks.
- Citing the lack of substantial improvement in the labor market, the Federal Reserve took further steps to support growth and promised to do more if needed.
Fear Subsides, But Uncertainties Remain
August 17, 2012
- July economic data picked up, following relatively soft results in the three previous months.
- Growth is likely to remain moderate in the near term. The economy continues to face two key downside risks: a potential collapse in Europe and the fiscal cliff. However, fears associated with these risks have decreased over the last month.
- The odds of further policy action from the Federal Reserve have decreased as the economic data have improved. However, the Fed would likely respond to an increased threat of deflation – if that were to occur.
The Fed Responds to Downside Risks
July 9, 2012
- Recent economic data have remained consistent with a moderate pace of economic growth in the near term.
- Europe and the fiscal cliff remain the two key uncertainties and the major downside risks to the growth outlook.
- Responding to these downside risks, the Federal Reserve extended Operation Twist through the end of the year. Officials are poised to do more, which may make QE3 a close call for the policy meeting later this month (decision due on August 1).
Headwinds, Tailwinds, and Two Major Concerns
June 5, 2012
- Recent economic data have remained consistent with a moderate pace of economic growth in the near term.
- Two headwinds, housing and gasoline prices, are poised to become tailwinds. However, the fiscal cliff and the fallout from Europe are major downside risks to the growth outlook.
- Monetary policy should remain highly accommodative, but further asset purchases from the Federal Reserve (QE3) would depend on a substantial deterioration in the economic outlook.
More of the Same
May 14, 2012
- Recent economic data have remained consistent with a moderate pace of economic growth in the near term.
- Europe has become, once again, a key concern for U.S. investors. The impact on U.S. exports is expected to be moderate, but there�s significant fear of financial contagion. Uncertainty (about what will happen) is expected to remain high and it will be a long time until the crisis is fully resolved.
- Monetary policy should remain highly accommodative, but further asset purchases (QE3) would depend on a more substantial deterioration in the economic outlook. The “fiscal cliff” is getting more attention, but lawmakers are unlikely to act until after the November elections.
The Fed, Europe, and Bond Yields
April 16, 2012
- Recent data, while mixed, continue to suggest moderate economic growth in the near term.
- The economy continues to face a number of headwinds, including higher gasoline prices, although the drag from these headwinds should decrease over time.
- Monetary policy will be conditional on how the economy evolves. Short-term interest rates are expected to remain exceptionally low for a long time. Further asset purchases (QE3) would depend on a faltering of the economic recovery.
A Few Unanswered Questions
March 20, 2012
- Recent data, while mixed, continue to suggest moderate economic growth in the near term. Job growth has picked up.
- An unusually mild winter has helped boost overall economic activity, but may have pulled forward seasonal gains that would have occurred in March and April. Higher gasoline prices threated to dampen consumer spending and business hiring.
- Further monetary policy stimulus (QE3) appears to be less likely, dependent on a faltering in the recovery or inflation staying well below the Fed’s target. The Fed is likely to retain its conditional commitment to keep short-term interest rates exceptionally low into late 2014.
Growth in the Spring
February 8, 2012
- Recent data continue to suggest moderate economic growth in the near term. Some figures were likely aided by unusually mild weather in December and January.
- Federal Reserve officials do not expect to raise short-term interest rates until late 2014, although they are divided on when to hike and how fast. The Fed formally adopted a 2% target for inflation and a soft target (5.2% to 6.0%) for the unemployment rate. However, this does not change how monetary policy will be conducted.
- European troubles continue, although the ECB’s liquidity efforts appear to have headed off a broader banking crisis. The bigger concern for the U.S. economy will be fiscal policy in 2013 – and we may not get any clarity until after the election.
Moderate Growth in 2012, but Worries About 2013
January 17, 2012
- Economic growth appears to have remained moderate in late 2011. Inflation pressures have receded.
- Moderate growth is expected to continue in 2012, but Europe will remain a major concern for investors.
- The Federal Reserve is expected to keep monetary policy steady in the near term, but could undertake another round of asset purchases (“QE3,” in mortgage-backed securities) if warranted. The Fed will soon begin publishing projections of the appropriate federal funds target rates.
2012 – A Conditional Outlook
December 8, 2011
- The economic fundamentals have been mixed, but generally positive in late 2011. Growth is expected to improve over the course of 2012, but there are some important caveats.
- It’s likely that we’ll soon see extensions of unemployment insurance benefits and the 2011 payroll tax reduction. If not, the outlook for consumer spending growth will be significantly weaker in the first half of the year. The November election will be important for the markets, but there is a lot of uncertainty about fiscal policy into early 2013.
- Europe is a significant risk to the outlook. There’s still hope that policymakers can work it out, but strains have increased and the markets are suggesting that there’s not a lot of time.
November 9, 2011
- Recent data reports continue to suggest moderate growth in the near term. The economy continues to face a number of headwinds and will be subject to some downside risks.
- The Federal Reserve made no changes at the November 1-2 policy meeting, but is poised to do more if deemed necessary.
- Most financial market participants have focused recently on the situation in Greece. However, Italy is quickly becoming a much bigger worry, representing a major downside risk.
October 11, 2011
- Recent data reports continue to suggest positive, mixed, but subpar, economic growth in the near term.
- The Federal Reserve’s maturity extension program has pushed long-term interest rates lower, which should help support the economy into early 2012. Fiscal policy is set to become a more significant drag on growth next year.
- European leaders have pledged to come up with a concrete plan, by the end of October, to shore up the region’s banks and to help stabilize the euro-zone. If the plan is deemed sufficient, a major uncertainty for U.S. investors will be reduced.
September 14, 2011
- Recent data continue to suggest a subpar rate of economic growth in the near term (positive, but below potential). Risks to the growth outlook remain weighted to the downside.
- The 2012 growth outlook depends on monetary and fiscal policy. Fiscal stimulus (the jobs package) would help prevent a significant fiscal drag next year. The balance of Fed comments suggests more monetary accommodation is on its way.
- Worries about Europe�s debt crisis remain an important factor for U.S. investors. The next few weeks will be critical.
Fear And Uncertainty
August 23, 2011
- With the debt ceiling nonsense behind us, investors have focused on worries that the U.S. economy may slide back into recession and on concerns that Europe’s sovereign debt crisis could evolve into an international banking crisis.
- Recent data reports have suggested a subpar rate of economic growth in the near term, not a recession. Risks to the growth outlook are tilted to the downside and gasoline prices will be a major wildcard in the second half of the year.
- Policy prescriptions remain limited. The Fed is unlikely to undertake another round of asset purchases (QE3) anytime soon. Fiscal policy has been tightening, but there are likely to be some efforts to provide support into 2012.
Slower Growth, More Uncertainty
July 19, 2011
- Recent data reports have remained consistent with a subpar rate of growth in the near term. Growth is still expected to pick up in 2H11, but the risks are tilted to the downside.
- Difficulties in raising the debt ceiling have generated some anxieties for investors, but a completed budget deal would likely be taken well by the financial markets.
- Federal Reserve policy is expected to remain on hold. Fiscal policy will become more contractionary.
Slow Patch, Temporary Or Not?
June 20, 2011
- The broad range of economic data reports has signaled a slowing in the pace of growth in the near term.
- Weighing the positive and negative forces at work on the economy, growth is likely to pick up in the second half of the year. However, risks appear to be tilted to the downside and there is little scope for further monetary or fiscal stimulus.
- The Federal Reserve is expected to complete its large-scale asset purchase program this month (QE2), but will continue to reinvest maturing securities into Treasuries. There is a high bar for the Fed to do another round of asset purchases (QE3).
The Gasoline Price Impact
May 18, 2011
- Energy prices are always a wildcard in the economic outlook. This year�s rise in gasoline prices will dampen consumer spending growth in the near term, but the impact, which shows up with a lag, is unlikely to lead to a recession.
- Higher energy prices tend to have a transitory impact on consumer price inflation. The key is whether there will be second-round effects: higher core inflation, higher wage increases, and higher inflation expectations.
- The Federal Reserve is expected to keep monetary policy steady, leaving the federal funds rate target unchanged and keeping the size of the balance level after long-scale asset purchases (LSAP) end in June. At some point, the Fed will begin the process of normalizing monetary policy, but not soon.
Recovery Continues, But With New Worries
April 7, 2011
- The economy continued to advance in 1Q11, although the pace of underlying demand appeared to slow. Job growth has improved, as small and medium-sized firms have begun to hire.
- The rise in oil prices should dampen the pace of growth to some extent and boost consumer price inflation in the near term. A lot depends on what happens to oil prices from here, but to date, the economy appears unlikely to slip into recession.
- The Federal Reserve views inflationary pressure in food and energy prices as “transitional,” but will watch the trends in underlying inflation and inflation expectations closely.
The Threat From Higher Oil Prices
March 10, 2011
- The economic outlook improved further in early 2011. A few headwinds (lingering problems in housing, strains in state and local government budgets) were expected to restrain the pace of the recovery, but new hiring and increased bank lending were poised to deliver positive momentum for growth.
- The recent rise in oil prices poses threats to the outlooks for growth and inflation. To date, the increase in gasoline prices will reduce the pace of growth somewhat, but should not lead to a recession. Inflation will be higher in the near term, but core inflation is likely to be up only moderately in 2011.
- The Federal Reserve will closely watch the impact of oil prices on inflation expectations. As long as inflation expectations remain well-anchored, higher oil prices are unlikely to force the Fed to tighten monetary policy.
Upgrading The Near-Term Outlook
February 11, 2011
- The economy appears to have entered 2011 with an increased amount of momentum. There are still a few headwinds, but the recovery is picking up a bit of steam.
- Job destruction has continued to trend at a low level. New hiring should improve in the spring.
- The Federal Reserve is set to complete its $600 billion asset purchase program by the end of June, but should continue to reinvest principal payments from its mortgage portfolio into long-term Treasury securities. An increase in short-term interest rates is not expected until 2012.
More Of The Same
January 19, 2011
- The economy ended 2010 on a strong note. Real consumer spending is likely to have grown at an annual rate of more than 4%. A slower pace of inventory accumulation will subtract from 4Q10 GDP growth, but a drop in imports will add to growth.
- The economy still faces a number of headwinds in early 2011, including lingering problems in residential real estate, strains in state and local government budgets, and higher gasoline prices. These headwinds aren’t going to push us into a recession, but they will limit the pace of growth to some extent.
- The Federal Reserve is widely expected to complete its $600 billion asset purchase program by the end of June. While there’s some chance that the Fed could end up buying more later on, such action is not expected. Eventually, policymakers will take the foot off the gas pedal, but not anytime soon.
Gradual Recovery To Continue, Picking Up Over Time
December 9, 2010
- The good news is that the economic recovery is expected to continue in 2011, as positive momentum in consumer spending and business fixed investment battles continued headwinds.
- The bad news is that the recovery is unlikely to be strong enough to push the unemployment rate down by much.
- The risks to growth are still tilted predominately to the downside, but monetary policy will remain supportive.
The Fed Acts, Critics Respond
November 17, 2010
- Recent data continue to suggest moderate growth in the near term, not enough to push the unemployment rate down.
- Core inflation has continued to trend lower and is expected to remain mild for some time, a consequence of a high degree of excess capacity within the economy.
- The Fed’s November 3 decision to increase its asset purchases was met with widespread criticism. As with any decision to ease monetary policy, there are plusses and minuses, but the benefits outweigh the risks and the consequences of not acting would likely be severe.
More Fed Accommodation On The Way
October 14, 2010
- Recent data have continued to suggest positive but subpar economic growth in the near term.
- In its September 21 policy statement, the Federal Open Market Committee indicated that growth, while likely to remain positive, was too slow and that inflation was too low.
- Recent comments by senior Fed officials suggest that the FOMC is likely to announce plans for further purchases of longterm Treasury securities at the November 2-3 policy meeting.
Slow Patch Or Double Dip?
September 15, 2010
- Recent data continue to suggest positive economic growth, but at a relatively lackluster pace in the near term.
- The economic recovery will be susceptible to any major negative shocks. Some clarity on tax policy would help.
- The Federal Reserve is prepared to do more, but further credit easing efforts will be conditional on a more substantial deterioration in the economic outlook.
A Recovery at the Crossroads
August 12, 2010
- Recent data continue to suggest positive economic growth, but at a more modest pace in the near term than seen earlier.
- A double dip is still not the most likely scenario, but downside risks to the growth outlook have increased.
- The Federal Reserve and Congress have recently taken modest stimulus efforts. The Fed is ready to do more if needed.
A Moderate Outlook, But Downside Risks
July 8, 2010
- Recent economic data reports have generally been on the soft side of expectations, consistent with moderate growth.
- The outlook for 2H10 economic growth has softened over the last few months. A double dip recession appears unlikely, but the risks to the growth outlook are tilted to the downside.
- If needed (the recovery falters more significantly), there is limited scope for further monetary and fiscal policy stimulus.
Still A Moderate Recovery
June 10, 2010
- The economic recovery continued in May, but with a lackluster increase in private-sector jobs. The economy faces a number of headwinds in the near term, but a double dip recession appears unlikely.
- Core inflation figures have continued to trend lower.
- Federal Reserve policymakers are likely to keep short-term interest rates low well into 2011. The government’s fiscal policy is expected to be less supportive at the federal level, and contractionary at the state and local level.
Headwinds and New Worries
May 10, 2010
- The recovery has progressed further in April, with private-sector job growth finally picking up.
- A number of headwinds remain in the near term and some further hurdles lie ahead. A greater European debt crisis would have a mixed impact on the U.S. economy.
- Federal Reserve policymakers are likely to keep short-term interest rates low well into 2011.
A Moderate Path, With Continued Headwinds
April 22, 2010
- The U.S. economy continued to expand in the first quarter. The job market appears to have finally turned the corner. Still, the recovery will likely be relatively moderate.
- In contrast to fears of higher inflation, core inflation measures have actually been trending lower. The Federal Reserve is unlikely to raise the overnight lending rate this year.
- Long-term interest rates normally creep higher in an economic recovery. However, they should not rise so much that they threaten the recovery
The Long Road Back
March 17, 2010
- The recovery has progressed further in the first quarter of 2010. The pace of job losses has continued to slow and the economy appears to be on the verge of employment growth.
- However, a number of serious headwinds remain, restraining the pace of improvement for the next few quarters.
- Federal Reserve policymakers have already unwound most of the special liquidity facilities set up during the financial crisis and the normalization of monetary policy will continue. However, the Fed is expected to keep the federal funds rate low well into the second half of the year and probably into 2011.
Still A Gradual Economic Recovery
January 21, 2010
- The pace of job losses has slowed and the economic expansion continued to advance into early 2010. New hiring should begin to pick up. However, the economy will continue to face a number of headwinds in the near term.
- More fiscal stimulus in the form of a job creation bill is likely. However, stimulus will begin to ramp down later this year and into 2011. Uncertainty regarding whether the Bush tax cuts will be extended could be a problem for the stock market.
- The Fed is expected to keep the federal funds rate low well into the second half of the year and possibly into 2011. However, the policymakers will have a number of tools available during this tightening cycle.
The 2010 Economic Outlook
December 11, 2009
- The economic expansion should continue in 2010, but at a moderate pace as the economy continues to work through financial difficulties. The outlook for 2011 is more clouded as the Bush tax cuts are scheduled to sunset at the end of 2010.
- The key factor in the growth outlook will be bank lending to consumers and small businesses. Credit should loosen over time.
- Conditional on an elevated unemployment rate, a subdued inflation trend, and well-anchored inflation expectations, the Federal Reserve is expected to keep short-term interest rates at exceptionally low levels well into the second half of next year and probably won’t start raising rates until 2011.
The Recovery: “V”, “U”, “L”, Or “W”?
November 11, 2009
- Recent data have continued to suggest that the economy is improving. The pace of job losses has moderated.
- Tight credit should keep the recovery on a relatively moderate track into the early part of next year. The labor market will remain soft in the near term, but fiscal stimulus and hiring for the census will provide support into early 2010.
- The Fed has signaled that short-term interest rates will stay low until the unemployment rate falls, core inflation picks up, or inflation expectations start to rise.