Here’s a summary of what Moody’s Analytics’ chief economist Mark Zandi forecasts for the U.S. economy in 2015:
• Growth should accelerate in 2015 as higher wages spur more spending, construction and investment.
• The sharp fall in oil prices will slow energy production but still be a net gain for the economy.
• How fast the Federal Reserve raises interest rates, and how markets respond when they do, will be key to the coming year’s economic story.
• As more Millennials begin forming households, housing demand and construction will take off.
• The aging population and a slower pace of technological change could weigh on the economy’s long-term potential.
• Problems in Europe and China have the potential to hinder the U.S. expansion in 2015.
In general, 2014 was a good year for the U.S. economy, and 2015 should be even better.
The most encouraging development of the past year was the rapid decline in joblessness. At the current pace of job growth, the U.S. economy is fast approaching full employment. The next critical step in the economy’s return to full health is a meaningful acceleration in wage growth, which appears imminent.
Most surprising has been the recent slide in oil prices, which, if sustained, will provide a significant boost to growth. The U.S. produces a lot more oil than it used to because of the shale revolution, and falling prices will take a toll on future energy development, but the country is still a significant net consumer of oil. As consumers put less of what they earn into their gasoline tanks holiday shopping season will receive a lift.
Arguably the biggest disappointment in 2014 was the sideways housing market. The surge in mortgage rates in late 2013 and tight mortgage credit hurt home sales and construction. But mortgage rates have receded and the credit spigot has begun to open. Many Millennials who have delayed forming households will begin to do so soon as the job market improves making housing a more significant source of growth.
This highlights a key threat to the economy in the coming year; namely, the chance that the Federal Reserve will begin to raise interest rates.
The Fed needs to engineer short- and long-term rates higher, consistent with the improving job market, in a way that keeps the housing recovery on track. Policymakers have all the tools they need and have gained valuable experience in communicating with financial markets.
Yet the process of normalizing monetary policy may not be as graceful as we hope.
The U.S. is also vulnerable to a softer global economy. With the euro zone and Japan flirting with recession, and China’s growth steadily throttling back, the U.S. trade situation will erode. This will be made worse by the recent surge in the value of the dollar, which is sure to continue. If conditions don’t get any worse overseas, the U.S. recovery should hold firm. This is a big if.
The other developing concern is the U.S. economy’s weak potential growth rate. Underlying labor-force and productivity growth remains disappointing. Their weakness will help return the economy to full employment more quickly, but if they do not improve growth will be weaker over the longer term. A persistently low rate of new business formation, which is the fodder for innovation and productivity gains, adds to worries.
However, it is premature to conclude that the economy’s supply side won’t come back to life as full employment approaches. The U.S. has a surfeit of potential workers who stepped out of the job market during the tough times; some of them will step back in as wage growth and job opportunities return. Business formation and investment should also recover as the psychological shadow of the Great Recession fades and risk-taking revives.
The bottom line: Betting against the American economy remains a bad strategy. The U.S. has clearly had a difficult run over the past 15 years, and has been scarred by terrorism, wars, technology and housing bubbles. Lower- and middle-income households have seen living standards decline. But the bad times are likely ending. Many of the economic wrongs have been righted. Households have deleveraged, the financial system has recapitalized, and U.S. businesses have reduced their cost structures and are highly competitive. Serious problems remain and politics complicate our ability to address them. But if history is any guide, we will.Â
