The economy stumbled early this year, but found its footing in the spring and appears to finally be hitting its stride according to a report released today by TD Economics, an affiliate of TD Bank.
"The winter chill is definitely gone and the economy is heating up along with the weather," says TD Bank's Chief Economist, Beata Caranci. "Persistent strength in the job market and resurgence in consumer spending adds to our confidence that the weakness in the first quarter was an aberration. We are on track for healthy growth over the remainder of the year."
Economic growth is expected to average 2.5% on an annual average basis in 2015 and accelerate to 2.9% in 2016. With job growth holding above 200,000 a month, the unemployment rate will fall from 5.5% to 5.0% by the end of 2016.
As headwinds lift, household spending will carry economic growth...
One doesn't have to look far for explanations for the lackluster pace of growth early in the year. "Unseasonably cold weather, west coast port disruptions, and declining investment in the oil and gas sector all share in the blame," says Caranci.
Perhaps just as disappointing was the slowdown in consumer spending growth. After growing by close to 4.0% (at an annualized rate) over the second half of last year, household spending growth fell to half this rate in the first quarter of the year. Spending growth slowed even as households were beginning to see the benefits of lower gasoline prices.
"Consumer spending disappointed, but must be put in context. The saving from lower gasoline prices is small at first, but accrues over time," says Caranci. "The longer that gasoline prices remain low, the more likely it is that households will reallocate that part of their budget to other goods and services, giving support to total spending growth."
With additional support from job growth and rising wages, TD Economics expects consumer spending growth to accelerate to 3.6% over the second half of 2015.
Job market on track for another great year...
One bright spot in the economic data over the first half of the year has been the performance of the job market. Job growth has averaged 217,000 a month over the first five months of the year. This is just a shade below the 229,000 over the same period a year ago. "Given that job growth in 2014 was the best in 15 years, this is a really good showing," says Caranci.
The ongoing strength in job growth is important for a number of reasons. First, it suggests that the economy is probably not as weak as the first quarter real GDP data indicated. "Some of that reported weakness likely reflects changing seasonal patterns that don't appear as prominent in the labor market," says Caranci.
Second, it suggests that the Federal Reserve is still on course to raise interest rates this year. With unemployment falling and wages rising, key pieces are falling into place for the Federal Reserve to begin pushing rates higher in September. "Investors will need to dig into the recess of their memories. The last time the Fed began a rate-hiking cycle was in 2004. So while we believe the Fed will communicate a go-slow approach, investors should brace themselves for volatility." says Caranci.
TD Economics expects the Federal Reserve to begin its rate hiking cycle September and to raise rates by 50 basis points (0.5 percentage points) in each of the next two years, bringing the fed funds rate to 1.25% by the end of 2016.
TD Economics provides analysis of global economic performance and forecasting, and is an affiliate of TD Bank, America's Most Convenient Bank®.
The complete findings of the TD Economics report are available online at http://www.td.com/document/PDF/economics/qef/qefjun2015_us.pdf