The U.S. still hasn’t recovered fully from the Great Recession of 2008-2009, but it’s getting closer.
Jay Bryson, managing director and global economist for Wells Fargo, told participants at the 2013 SVIA Fall Forum that he foresees real U.S. gross domestic product growing by about 2.5 percent in 2014 and 2.75 percent in 2015. That would be down from the 3.2 percent growth rate averaged from 1992 through 2007, but up from the 2 percent or so averaged over the past few years. In short, it’s sluggish but improving.
A key component of that forecast, Bryson says, is his expectation that consumer spending, which accounts for about two-thirds of GDP, will continue to gradually grow as well. Stronger gains in consumer spending would translate into stronger economic growth, of course, but several factors are working against that, Bryson said. Although many Americans have successfully deleveraged their personal balance sheets—shrunk their debt, in other words—relatively few are showing any sign of wanting to leverage up again. While more have been willing to take on car loans, the biggest driver of non-revolving credit over the last few years has been student loans. “That’s not a sign that people want to leverage up, but that they are desperate to improve their earnings power,” he said. In terms of consumers deleveraging, he said, “my sense is that we’re in the seventh inning,”
The biggest potential for better-than-expected economic growth, Bryson suggested, lies in the chance that Americans begin saving less and spending more. But he said that isn’t likely to happen unless employment growth accelerates. While the country has been creating about 180,000 jobs per month on average, despite declining employment in the government sector, that rate would have to accelerate to 250,000 to 300,000 a month to make a real difference in savings rates, consumer spending and the economy.
Bryson said there is pent-up demand among consumers, especially for cars and houses. He noted that the average car on American highways is now 11 years old and that the country has been building just under a million new housing units per year. Just to keep pace with household formations, he said, we need to be building between 1.25 million and 1.5 million units annually.
Given this sluggish economic outlook, Bryson said he doesn’t expect the Federal Reserve to begin raising short-term interest rates anytime soon, especially since inflation is running at about half the Fed’s target rate of 2 percent. Besides, he noted, the Fed has specifically said it won’t push short rates higher until unemployment hits 6.5 percent. The unemployment rate stood at 7.2 percent in September, and Bryson said he doesn’t expect it to fall to 6.5 percent until early 2015.
Bryson said the Fed could act sooner to end its quantitative easing program aimed at holding down longer-term interest rates. That program involves the Fed buying $85 billion of bonds monthly, and the Fed has said it will begin to taper its bond buying once the economy looks stronger. Bryson said the earliest he expects the Fed to start tapering is December of this year, and that it might not begin until early 2014.
There are no guarantees the economy will continue its slow recovery without slipping back into a recession, of course. Bryson identified three potential threats, the first being an extraordinary event, such as a Middle East war that sends oil prices soaring to $200 a barrel, for example, or the federal government defaulting on its debt. Europe is the second, he said. It has only recently emerged from its second recession since the 2008 credit crisis and it continues to face troubling debt issues in some of its member countries.
The third threat is China, whose economic growth has slowed as it tries to transition from an economy based almost entirely on capital investment to one based more equally on capital spending and consumer spending. Bryson said his firm is in the camp that believes China’s economy, which had been growing at 10 percent or more annually until recently, will make a “soft landing,” growing in the 7 percent to 8 percent range over the next couple of years.
“To sum up, assuming we don’t shoot ourselves in the head, and Europe and China don’t blow up anytime soon, the outlook for the global economy is not bad,” Bryson concluded.