U.S. Overview
Not Too Hot, Not Too Cold
The March employment report struck just about the right chord for an economy still reeling from harsh winter weather and still a bit apprehensive of the Fed backing away from its exceptionally easy monetary policy. Nonfarm employment rose by 192,000 jobs and modest gains for the previous two months were revised modestly higher. Job gains were also extraordinarily broad based and the labor force participation rate and employment-population ratio continued to inch up, suggesting that the broadening employment recovery is beginning to draw workers back into the workforce. While the labor market is heating up, it is not warm enough yet to warrant speeding up the wind down of the Fed’s securities purchase program or pull forward the date that the Fed will likely begin to push short-term interest rates higher. The better spring-time economic news came just in the nick of time. First-quarter economic growth now appears to have been even weaker than initially thought. We now estimate that real GDP grew at just a 0.4 percent pace in the first quarter, reflecting a slump in exports and less inventory building. The weather also cut into sales of new and existing homes, motor vehicles and other big-ticket items.
At least the first quarter ended on a strong note. In addition to stronger job growth, motor vehicle sales rebounded to a 16.3 million annual unit pace in March. Real GDP should bounce back in the second quarter and average better than a 2.5 percent pace through the rest of the year.
International Overview
Global Expansion Continues but Risks Remain
Economic growth in most foreign economies remains positive, and we look for the global expansion to continue over the next two years. The British economy grew faster than the Eurozone economy last year, and we look for this relative outperformance to continue. The Bank of England may begin to raise rates in mid-2015, but the European Central Bank (EDB) will likely refrain from tightening policy through the end of next year. The Japanese economy remained in expansion mode throughout 2013. Although the recent hike in the consumption tax may cause some near-term economic weakness in Japanese GDP growth, we forecast that the expansion in the Japanese economy will generally remain intact over the next two years.
China represents some downside risk, not only for Japan but for the overall global economy. The Chinese economy has become unbalanced in recent years due to excessive growth in credit that has financed robust growth in investment spending. Although we look for continued economic growth in China, albeit at a slower rate than in years past, we will be watching closely to see if debt-servicing issues among Chinese companies are becoming more generalized.
The Russian/Ukrainian crisis represents another downside risk to the global economy. Russia is an important energy supplier and an energy embargo, should one occur, could cause global economic growth to weaken considerably.