|
The June 25th statement from the Federal Reserve's policy-making body, the Federal Open Market Committee (FOMC), led with the simple fact that "economic activity continues to expand."2 That marks a significant upgrade relative to the FOMC's earlier expectation of a decline in economic activity in the first half. Forecasts more broadly have converged to our view that the economy is still growing, that fiscal stimulus will boost growth during the middle two quarters of this year, and that the economy will skirt a recession.Nevertheless, over the last several weeks factors that will importantly shape the growth outlook in the second half of this year and into early 2009 have moved sharply in the direction of weakening demand, and we have reflected these developments in this forecast. Notably, another jump in oil prices and a sharp downturn in equities have dramatically altered the outlook for growth of real personal consumption expenditures (PCE). Against the backdrop of consumer confidence that was already at recessionary levels, this lead us to mark down significantly our forecast of PCE and, hence, GDP growth starting in the third quarter. This shift has taken place just as many of the commentaries and forecasts on the economic outlook have turned more upbeat. We now anticipate that average GDP growth over the next four quarters will be just 1.6%, down 0.6 percentage point from last month.As noted above, this downward revision has occurred in response to the incoming information on energy and financial conditions, rather than the economic data itself. Indeed, the incoming economic data have pointed to a somewhat better-than-expected outcome over the near term. The upward revision to first-quarter growth of real GDP to 1% was in line with expectations. More important was the evident strength and the upward revisions to forecasts (ours and others) of PCE growth in the second quarter. This reflected the stronger-thanexpected report for May retail sales and real PCE. The strength in PCE was all the more impressive given the continuing weakness in motor vehicle sales (discussed below). Even we "optimists" found ourselves revising up. Indeed, the shift in our forecast of real PCE growth, from 2.0% last month to 3.4%, accounted for nearly all the upward revision in projected second-quarter growth in real GDP, from 1.7% last month to 2.9% this month.One useful indicator of the economy's forward momentum into the second quarter was the very solid growth in Macroeconomic Adviser's monthly GDP measure in March, April, and May, following a sharp decline in February. The monthly gains in real GDP in March and April spending are especially impressive because they predate any significant boost from the tax rebates. In addition, May retail sales and real personal consumption expenditures appear consistent with the strength we expected as a result of the first arrival of the tax rebates. Still, most of second-quarter growth comes from rising net exports and the boost from fiscal stimulus. Domestic demand is going to have to be rebooted if the economy is to move to more solid growth ahead, as discussed below.It is too early to reach a definitive conclusion on the effects that the tax rebates are having on the economy. Through May, however, the data-specifically robust growth in retail sales and real PCE-is at least consistent with our view that the rebates will provide a significant boost to consumer spending and GDP in the middle of this year. June data on retail sales was somewhat disappointing, but was still broadly consistent with the overall effects from the rebates we expect, especially if the strength in April and May reflect consumer purchases made in anticipation of receiving the rebate payments.The benefit from the fiscal stimulus, in our view, is that it will shift growth to the middle two quarters-a period that otherwise seemed very vulnerable to a decline in economic activity. But, while bolstering growth in those quarters, fiscal stimulus would be expected to involve a payback once the boost to consumer spending dissipated. That payback will likely create a hole in growth in the fourth quarter. With a weaker pace of underlying growth in the forecast, we now expect this payback to drag fourth-quarter GDP growth down to -0.5%.
|
