Date of this Version
Business in Nebraska, VOLUME 69, NO. 711 (JANUARY 2015)
There is ample evidence of a self-sustaining U.S. economic recovery fueled by improved consumer spending, business investment and housing activity. These conditions have led to rapid economic growth in the last three quarters of 2014. In recent months, the national economy also has benefited from a steep decline in gasoline prices.
These fundamental macroeconomic conditions are expected to persist over the next three years. However, the pace of growth will likely vary. In particular, economic growth may be challenged in early 2015 due to shocks in the international economy. China is facing a period of reckoning after propping up economic growth for decades with unnecessary government “investment” in highways, railways and buildings. At the same time, rapid economic decline in a mismanaged Russia is limiting growth in Europe. An already weak European economy is struggling to adjust to this shock but should be able to recover again during 2015. The sharp drop in oil prices also will depress growth in oil-producing regions within the United States.
Another factor is an anticipated interest rate increase by the Federal Reserve Bank. These rate increases have been long anticipated and the Fed has strongly signaled that the first rate increase remains on schedule for mid-2015. However, there is uncertainty about the timing of the rate increase and concerns about the pace of the increase. This uncertainty may postpone some business decisions but should be resolved by mid-2015 as the Federal Reserve Bank begins a regime of slow, steady rate increases. This is when economic growth should begin to re-accelerate. Overall growth in 2015 will be solid and there will be stronger growth in 2016 and 2017.
Real GDP growth is expected to reach 2.4% in 2015. Growth will accelerate to 2.6% in 2016 and 2017. Solid growth in real GDP will support continued improvement in the labor market. The rate of job growth, however, will decline as the economy edges towards full employment. Job growth will reach 1.8% in 2015, 1.6% in 2016 and 1.5% in 2017. With the decline in oil prices, inflation will be 1.7% in 2015 before ticking up to its long-term rate of 2.0% in 2016 and 2017.
As has been true in recent years, several factors will limit annual economic growth to around 2.5%. The steady retirement of baby-boom generation workers will limit growth in the labor force. Economic growth also will be limited by several unmet policy needs. For example, there is an unmet need to pass immigration reform to meet workforce skills gaps and grow the working age population. There is also a need for tax reform to encourage business confidence and investment. Entitlement reform also would help build the confidence of both businesses and households. Unfortunately, it seems unlikely that these key reforms will be addressed.