Economic Growth Slowing After Mid-Year Burst, But 2015 Expected To Top 2014


Posted by Heidi Schwartz

Economic growth in the U.S. is slowing from the strong mid-2014 numbers to a more moderate pace heading into next year, but continued improvements in employment, income and consumer and business spending are expected to drive year-over-year growth overall, according to Fannie Mae‘s Economic & Strategic Research (ESR) Group. Full-year economic growth is expected to come in at 2.5 percent for all of 2015, a modest increase above the 2.1 percent forecast for 2014. Although the global economic slowdown in the Eurozone, China and Japan, as well as ongoing geopolitical events in Russia, Ukraine and the Middle East, remain the largest downside risks to the forecast, the Group believes the risk of recession is low.

“The pace of growth around the middle of the year was well above trend, driven by an unsustainable rebound after a weak first quarter, and we anticipate that the fourth-quarter numbers will presage a more modest pace for 2015,” said Fannie Mae Chief Economist Doug Duncan.

The sluggish global growth outlook has prompted long-term interest rates to move markedly lower. The ongoing decline in oil prices has helped to bring down headline inflation. This leaves more cash in consumer pockets but prompts concern at some central banks that the inflation rate may continue to decline from levels that are already below central bank targets. For example, in response, the Bank of Japan unexpectedly announced additional easing measures last month in an attempt to bring the inflation rate up to its 2.0 percent target.

Economic Growth Slowing; Remains Above Trend

The advance estimate of third quarter gross domestic product (GDP) showed real growth at an above-forecast 3.5 percent annualized pace, which followed a robust rebound gain of 4.5 percent annualized in the second quarter. The details were less encouraging than the headline growth, however. A key indicator of underlying growth for the private sector— real final sales to private domestic purchasers (which includes domestic spending by consumers and businesses and excludes inventories)—grew 2.3 percent, slowing from 3.8 percent in the second quarter. Also, third quarter growth may be subsequently downgraded. The Bureau of Economic Analysis assumed a 1.3 percentage point contribution to third quarter GDP from net exports in its advance estimate, though the September trade report released after the GDP report suggests the contribution likely will be revised lower to roughly one percentage point.

Manufacturing Expansion Remains In Place

Besides the drop in consumer spending in September, another disappointing piece of news came from the durable goods orders report, as September core durable goods orders—a leading indicator for business capital investment—posted the largest drop since January. However, other factory-related news was positive. Manufacturing output rebounded in September, offsetting the drop in the prior month, and the Institute for Supply Management (ISM) manufacturing index rebounded sharply in October, suggesting that the expansion in the sector will remain in place despite slowing demand abroad.

For the executive summary of the report, click this link.