Economic Outlook: Strong in the Long-Term

U.S. Long-Term Outlook

The long-term economic outlook for the United States looks strong as job growth and low inflation free up more disposable income for many Americans. 

The U.S. is well-positioned to benefit from increasing world trade. Trade liberalization is rising as markets open, and economic growth in rapidly expanding Asian economies presents a major business opportunity for the United States. Every indication is that U.S. businesses will capitalize on this trend.

Emerging markets comprise an increasingly significant share of the United States’ trade transactions, and they are expected to flourish. China and Vietnam are slated to be the fastest-growing importers of U.S. goods over the long term, with a 9-percent rise in projected annual demand. China, Canada, Mexico, and Japan are expected to remain the U.S.’s top trading partners.

U.S. Short-Term Outlook

After the Commerce Department released its initial estimate of first-quarter GDP growth, economists were disappointed to note that the GDP had grown so little relative to their expectations. Between the release of the first and second estimates, many economists revised their expectations further downward, considering the initial estimate of 0.2 percent growth optimistic. At the end of May, the Commerce Department revealed that the U.S. economy contracted 0.7 percent in the first quarter of 2015 (according to its second estimate).

Slowing GDP growth was attributed primarily to three factors: labor disputes at West Coast ports that decelerated shipping, harsh winter weather that once again dampened consumer spending, and a strong U.S. dollar, which negatively affected exports. Exports fell 8 percent in the first quarter, while imports increased 6 percent. Corporate profits also trended downward, falling 6 percent compared to the fourth quarter of 2014.

As much as the situation sounds like a repeat of last year, first-quarter GDP growth is always a bit of an anomaly. In fact, over the past several years, the first quarter has averaged 0.6 percent annualized growth, while the other three-quarters have averaged 3 percent annualized growth. At this point, however, the second quarter isn’t demonstrating evidence of a strong comeback, but almost all economists expect some uptick in growth.

Reports from the Federal Reserve have been mixed on the topic of inflation as it relates to economic growth. Federal Reserve Chair Janet Yellen recently said that she expects consumer price inflation will move up to the Central Bank’s 2-percent target as the economy strengthens. However, Eric Rosengren, president of the Boston Federal Reserve, said in June that “conditions for beginning the tightening of monetary policy have not yet been met.” As is typically the case, an assessment of the strength of the U.S. economy varies according to the articles you read and the economists you trust.

Since GDP growth measurements look backward rather than forward, other economic indicators are important in analyzing the future health of the economy. For example, the labor market is currently strong, and jobs are growing rapidly. Job growth indicates that business owners are optimistic about demand for their products and services. Housing is also a good indicator of economic strength because people invest in houses when they are confident in their income stream and future circumstances. Current increases in home demand and home prices signal that the economy is getting stronger in that aspect. Looking at gains in jobs and housing, the U.S. economy is growing—it may just continue to take some time.

U.S. Consumer Price Index

The United States Consumer Price Index (CPI) for all urban consumers increased 0.2 percent in April on a non-seasonally-adjusted basis. Over the last twelve months, the index has declined 0.2 percent, which is below the Federal Reserve’s target inflation rate of 2 percent.

The index for all items less food and energy rose 0.3 percent in April on a seasonally-adjusted basis. Due to large fluctuations in food and energy, analysts often use the ‘all items less food and energy’ index to more accurately measure price growth in the nation. April’s increase validated confidence in the economy’s overall strength, leading to a bump in the valuation of the U.S. dollar when compared to other currencies.

The price indices for shelter, medical care, household furnishings and operations, used cars and trucks, and new vehicles all increased in April. The overall energy index experienced a slight decline. Within the energy index, gasoline, natural gas, and fuel oil all declined, and electricity did not change. Food overall didn’t change from March to April, but food at home declined in price as food away from home increased in price. The price effects of the bird flu outbreak in the Midwest were likely offset by the overall decline in dairy prices as milk supply remains strong amid declining demand.

The twelve-month decline in the overall CPI was driven primarily by the decrease in the energy index, which has fallen 19.4 percent since this time last year. All major components of the energy index except electricity have fallen in the past twelve months.

U.S. Consumer Confidence Index

The U.S. Conference Board Consumer Confidence Index (CCI) increased 1.1 points in May. The Index currently stands at 95.4 points, up from 94.3 in April. The Present Situation Index, the sub-index of the CCI that measures how consumers feel about current economic conditions, currently sits at 108.1—up 3.0 points from its level last month. The Expectations Index, the sub-index of the CCI that measures how consumers feel about economic conditions six months from now, decreased 0.2 points from April to May and currently sits at 86.9.

Sentiment regarding current conditions improved in May as more people stated that jobs in their area are plentiful—20.7 percent compared to 19.0 percent last month. In the same vein, however, those who claim jobs in their area are “hard to get” also rose—from 25.9 percent to 27.3 percent. Consumers aren’t necessarily more positive about business conditions in their area, but they are less negative. Those who say business conditions are “good” edged down from 25.5 percent to 25.2 percent, but fewer people said business conditions in their area were “bad”—17.4 percent in contrast to 19.2 percent last month.

Consumers overall are less optimistic about future conditions. A slightly higher percentage of consumers expect business conditions to improve over the next six months—15.6 percent in May compared to 15.4 percent in April. However, more consumers also expect business conditions to worsen—10.8 percent in May compared to 9.1 percent in April. Consumers are optimistic about the job market: 14.6 percent anticipate more jobs six months from now, which is up 0.8 percent from last month. Expectations for income growth over the next six months remain unchanged, with 17.4 percent expecting an increase in income.