WASHINGTON – The U.S. economy’s tepid performance last quarter — a 2.2 per cent annual growth rate — was typical of the economic rebound that began in the summer of 2009. Yet the sluggish pace of the recovery has a silver lining: This growth spurt has proved to be one of the most durable since World War II.
Will it last? It’ll depend on a number of factors in the months ahead, including a potential rate hike by the Fed, the strong dollar, oil prices and consumer spending.
The economy’s performance in the October-December period matched the average growth of the past five years — a lacklustre pace that has been far lower than the growth gains normally seen coming out of such a deep recession.
But like the turtle versus the hare, slow and steady may win the day. The current expansion will mark its sixth anniversary in June, meaning it will have already lasted 14 months longer than the average expansion since the end of World War II. Before the war, periods of expansion tended to be shorter and the economy more volatile.
“This recovery has been disappointing in terms of growth so far but if you are looking for a silver lining, it is that the slow rate of growth has allowed the economy to avoid the kinds of excesses that can lead to over-building, over-lending or other problems,” said Mark Zandi, chief economist at Moody’s Analytics. “We are a long way from that.”
The longest recovery on record was the 10-year growth period that lasted from March 1991 to March 2001. But many economists believe this expansion could surpass that. Zandi said it may only be at the half-way point, meaning it could last another six years.
Here are the factors that could weaken the economy, keep it going at the current modest pace or accelerate its growth in the months or years ahead:
RISKS OF A SLOWDOWN
The biggest threats this year are international. While the United States is powering ahead, its major trading partners like Europe and Japan are lagging. Even China, the world’s second biggest economy, is grappling with slower growth. Weaker momentum overseas hurts sales of U.S. exports. Adding to the pressure is the dollar, which is strengthening as investors flock to dollar-denominated assets seeking better returns. The U.S. currency’s rise will act as a drag on exports, making American goods more expensive in foreign markets.
U.S. growth could also be hurt by cutbacks in investment spending by businesses. In a report earlier this week, the government said orders to U.S. factories for long-lasting manufactured goods fell in February. Moreover, a key category that serves as a proxy for business investment spending fell for the sixth straight month. Part of that weakness reflects cutbacks at U.S. energy companies, which are scaling back drilling plans in the face of tumbling oil prices.
SLOW AND STEADY
The U.S. economy has weathered a number of storms over the past six years — from a European debt crisis to last year’s polar vortex and frigid winter storms. Yet it managed to keep moving ahead. The severe winter last year threw the economy into reverse, with GDP contracting at an annual rate of 2.1 per cent in the first quarter of 2014. Analysts believe the economy is taking a similar, but less severe, hit this winter as well. Forecasters at Macroeconomic Advisers say this year’s winter storms will trim first quarter growth by about 0.7 percentage point to around 1.7 per cent.
While the bad weather depressed first quarter activity, many economists predict a solid bounce back in the second quarter, similar to the March-June period of 2014 when growth jumped to 4.6 per cent. This time around, the rebound is unlikely to be as dramatic since the first quarter contraction was not as deep.
Nariman Behravesh, chief economist at IHS Global Economics, thinks that growth will rebound to a solid 3.4 per cent rate in the April-June quarter and remain robust for the rest of the year, helped by consumers who are benefiting from the equivalent of a tax cut with the big drop they have seen in gasoline prices.
“Consumers are going to be the engine of growth for the U.S. economy this year,” Behravesh said.
Other analysts are forecasting growth rate of about 3 per cent for the full year, which would represent an improvement from 2.4 per cent growth in 2014 and the strongest pace since 2005.
Their optimism is driven from impressive showing by the labour market, which logged the longest stretch of job creation in 17 years. The strong job gains are expected to continue this year. With more people working, consumer spending — which accounts for 70 per cent of economic activity — should remain brisk.
Hopes for the current recovery stem from the extremely low rates of inflation — just a rise of 1.1 per cent in the fourth quarter, according to a price gauge tied to the GDP. That is below the Fed’s 2 per cent target and means the central bank will not be in a rush to begin raising interest rates.
While many forecasters believe the Fed will start hiking rates later this year, it will be starting from a record low near zero, where the Fed’s benchmark rate has been for the last six years. Most forecasters don’t expect more than two small quarter-point increases this year, meaning rates will still be below 1 per cent at the end of the year, a level still very favourable for borrowers.