U.S. growth likely to exceed 3 percent

  • Bloomberg News
  • Thursday, July 10, 2014 3:03pm
  • Business

WASHINGTON — The fifth anniversary of the U.S. economic expansion will usher in a rare boon: growth exceeding 3 percent over a nine-month period, a Bloomberg survey of economists forecasts.

Gross domestic product will expand 3.1 percent from July through December following a 3.3 percent advance last quarter, according to the median forecast of 74 economists polled from July 3 through July 9. It would be the first time since 2004- 2005 that GDP has sustained such gains over an extended period.

“We’re in an environment where I don’t see any major headwind,” said Ethan Harris, co-head of global economics research at Bank of America Corp. in New York. “I see minor challenges. So things are aligned for better growth.”

Consumers probably will be buoyed by an improving job market and gains in stock prices, economists in the survey said. Business confidence will get a lift from less political brinkmanship, driving investment at the same time state and local government agencies are poised to boost spending. The economic momentum will carry over into 2015, making it the strongest year in a decade, even as the growth rate for all of 2014 is held back by the first-quarter slump, the survey showed.

Bank of America economists see the world’s largest economy expanding at a 3 percent pace in the second half of the year. The prospect of fewer government cutbacks, rising motor vehicle demand and more home sales will lead the push, Harris said.

This year’s pickup in hiring is among reasons economists are downplaying the 2.9 percent slump in GDP in the first three months of the year, which matched the worst performance during any expansion in the post-World War II era. The 18-month recession ended, and the recovery began, in June 2009.

Employers added 288,000 workers to payrolls in June, boosting the average monthly advance so far in 2014 to almost 231,000. If that pace is sustained, job gains this year would be the best since 1999. The jobless rate dropped last month to an almost six-year low of 6.1 percent.

“The job numbers reinforce our view that the economy’s struggles in the first quarter were an anomaly – they were a blip,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, who is among the most accurate forecasters of the unemployment rate over the past two years, according to data compiled by Bloomberg.

Moody’s Analytics projects payrolls will grow by 250,000 a month on average in the second half of the year, which “would be a very good sign that the economy is accelerating,” said Sweet.

A report Thursday showed fewer Americans than forecast filed applications for unemployment benefits last week, a sign the job market continues to strengthen. Jobless claims declined by 11,000 to 304,000 in the week ended July 5, the fewest in more than a month, according to Labor Department figures.

The first-quarter contraction pulled the 2014 median growth estimate down to 1.7 percent from the 2.2 projected last month, according to the Bloomberg survey. The forecast for 2015 held at 3 percent, which would be the strongest year since 2005.

Accelerated consumer spending, which is projected to grow 2.8 percent next year after climbing 2.2 percent in 2014, is one reason for the improved performance.

Nonetheless, elevated prices at grocery stores and gasoline stations represent a risk to the outlook, said Lynn Reaser, chief economist at Point Loma Nazarene University in San Diego, and a former president of the National Association for Business Economics. Wage gains barely have been able to keep up with inflation.

For the remainder of the year, “growth is likely to be around 3 percent at best, and it’s by no means clear that we’ve broken out of that 2 percent zone we’ve been in,” Reaser said.

GDP will probably gain traction even as oil prices are a “major risk factor” amid ongoing unrest in Iraq, she said. A pickup in inflation may also make it difficult for the Federal Reserve to keep a lid on record-low interest rates meant to stimulate demand, Reaser said.

Business investment, propelled by improving sales, will play a role in sustaining bigger gains in GDP, according to economists at Wells Fargo Securities Inc. in Charlotte, North Carolina, led by John Silvia. They forecast spending on new equipment will climb at an average 5 percent pace in the second half of the year after a 10 percent second-quarter advance that reflected a snap-back from a first-quarter drop.

Winnebago Industries Inc., a manufacturer of motor homes and recreational vehicles, is among those investing in manufacturing equipment and upgrading information systems. The Forest City, Iowa-based company reported its strongest quarterly revenue for the three months ended May 31 since 2005.

Capital expenditures could reach $10 million to $12 million this year, Chief Financial Officer Sarah Nielsen said on a June 26 earnings call. “We anticipate capex in fiscal 2015 to be elevated from this year,” Nielsen said. “We remain very optimistic for the future as we continue to see robust demand.”

With federal government spending levels set through September 2015, the debt limit suspended until March 2015, and lawmakers more focused on the November mid-term elections, there will probably be fewer legislative brouhahas, said Greg Valliere, chief political strategist at Potomac Research Group in Washington.

“I don’t see Washington screwing things up and being a significant headwind like it was last year,” Valliere said. Even amid concern over the Fed’s wind-down of extraordinary monetary policy, “the far bigger story is the fact that the economy is coming back quickly. You’ve got, just about everywhere you look – even housing now and maybe even business fixed investment – they’re all looking better and better.”

While federal budget cuts moderate from last year’s sequestration plunge, state and local government agencies will probably contribute fresh spending.

Voters in more than half of states will decide whether to keep their governors – boosting the likelihood that state officials will take action on projects before the November elections, said Daniel Clifton, a partner and head of policy research at Washington-based Strategas Research Partners.

“We’re seeing states starting to open up the spigots,” Clifton said. “So you get a little bit of a bump from the states that offsets the federal, and you’ve got no fiscal drag going into the second half of the year.”

State and local spending on construction projects climbed 6.1 percent in the three months ended in May, the biggest gain over a similar period in four years, according to Commerce Department data released July 1.

The mid-term elections in November also could pave the way for a further rise in the stock market as lawmakers are too busy campaigning to “do any damage,” Clifton said. That would help boost wealth among higher-income Americans.

The Standard &Poor’s 500 Index rose 8.7 percent on average in the fourth quarter of a mid-term election year since 1990, compared with a 3.7 percent gain in the final three months of the intervening years, according to data compiled by Bloomberg.

If it doesn’t impress in the second half, given the more favorable political climate and receding headwinds, the economy may have suffered more from the recession than previously thought, said Bank of America’s Harris.

“Assuming there are no new shocks, if we can’t get better growth in the second half of this year, then you really do start to go down the path of thinking the structural damage is even deeper than we thought,” Harris said.

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