Stronger US growth seen in 2015; Fed to hike rates in June: Reuters poll

Monday, 16 February 2015 00:00 - - {{hitsCtrl.values.hits}}

Seen through barren tree branches, workers receive supplies from below while working atop the scaffolded dome of the U.S. Capitol in Washington –REUTERS Reuters: The US economy is set to record its best performance in a decade this year as a rapidly strengthening labour market buoys domestic demand, giving the Federal Reserve the confidence to start tightening monetary policy, a Reuters poll showed. The poll of 82 economists, which was published on Wednesday, forecast Gross Domestic Product (GDP) growing an average 3.2% this year, which would be the fastest since 2005. Economists are maintaining their lofty forecasts despite the economy having hit a speed bump in the fourth quarter and appearing to have remained in the slow lane at the start of 2015. “There may be a few ups and downs this year, but the economy’s fundamentals are very strong and they are going to outweigh the issues from abroad; 3% GDP (growth) is achievable,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. US economic growth has been undercut by slowing Asian and European economies, which have hurt US exports. At the same time, a collapse in global crude oil prices has forced some businesses to either delay or cut back on capital expenditure. Most economists in the poll said slower global growth and disinflation, a result of falling crude prices and weak demand, were the biggest risks to US growth. Oil prices have nearly halved since June, sending US gasoline prices tumbling to multi-year lows. Cheaper fuel and a strong jobs market are expected to provide a strong tailwind for consumer spending this year, possibly offsetting the Fed’s concerns about low inflation and encouraging policymakers to start raising interest rates at their June meeting. The economy has added more than a million jobs over the past three months, a feat last achieved in late 1997. A key gauge of labour market slack - the number of job seekers for every open position - hit its lowest level since 2007 in December. For economists the data signals that a pick-up in wage growth, the missing piece in the jobs recovery, is imminent. Thirty-six of the economists in the survey expected a June rate hike, while 18 said it would happen only in September. That breakdown is similar to both the results of a survey of economists taken last month and the findings of a Wall Street primary dealers poll published on Friday. And 39 of 54 respondents in the latest poll said their conviction over the timing of the first rate hike has remained the same over the last month. “It will take higher wages to bring the labour market back into equilibrium. We are hearing more Fed members talking about raising rates mid-year and the tightening in the labour market is a major reason,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. The US central bank has kept its key short-term interest rate near zero since December 2008. While inflation is expected to drift further below the Fed’s 2% target this year, economists expect price pressures to gradually rise in the coming years as the effects of cheaper energy and a stronger dollar fade. The survey forecast an average 0.4% rise in the consumer price index (CPI) this year, picking up to 2.2% in 2016. That compared to average increases of 0.9% and 2.3%, respectively, in the January poll. Core CPI, which strips out volatile food and energy prices, was forecast averaging 1.7% in 2015 and 2% next year. The forecasts were little changed from the January survey. “A lot of the lower inflation we are seeing now is energy prices, which is transitional,” said Scott Brown, chief economist at Raymond James & Associates in Petersburg, Florida. “For the Fed, they are looking ahead. The Fed is considering taking the foot off the gas at this point.”