Don’t worry too much about a slump. The U.S. economy is going to shrug off that misleading 0.7% growth rate for the first quarter and keep adding jobs at a strong pace for the rest of the year, said Ryan Sweet, an economist at Moody’s Analytics and the winner of MarketWatch’s Forecaster of the Month contest for April.
In fact, it’s quite possible that by early next year the unemployment rate will drop below 4% for the first time since 2000, Sweet said in an interview.
“The hard data would tell you that the economy is very weak, but the soft data suggest that the economy was taking off,” he said. “The true health of the economy is somewhere in between.” By hard data, he refers to the reports on actual activity, such as sales volumes, prices and hiring. Soft data, by contrast, is based on surveys and includes a fair amount of subjective opinion about how consumers and business leaders feel.
He dismisses the weak first-quarter GDP report, chalking it up to some unseasonable weather and the continuing inability of the statistical agencies to get the seasonal adjustment right.
“The only certainties in life are death, taxes and a weak first-quarter GDP report,” he joked.
One excellent reason to ignore the GDP report: Continued strong job growth averaging about 175,000 per month, considerably more than the 100,000 needed each month to absorb the increase in the working-age population, he said.
“We’re not at full employment yet,” Sweet said.
He thinks wage growth will keep rising, in part because accelerating investment in software and other intellectual property will boost productivity growth. Slightly higher consumer price inflation will push companies to give slightly bigger raises to make sure their workers’ purchasing power doesn’t decline.
The growth in household incomes this year and next should keep the economy on track, he said.
With unemployment falling into the 3% range and inflation bubbling into the 2% range, the Federal Reserve will probably raise its short-term target rate two more times this year — in June and September, Sweet said.
Read: U.S. producer prices jump 0.5% in April
The Fed will probably pause on rate hikes in December when it takes the first step to reduce its balance sheet, he said. He expects further rate hikes in 2018, along with steady declines in the balance sheet.
Indicator Ryan Sweet’s forecast Number as reported*
ISM 58.6% 57.2%
Nonfarm payrolls 148,000 98,000
Trade deficit -$44.0 billion -$43.6 billion
Retail sales -0.3% -0.2%
Industrial production 0.4% 0.5%
Consumer price index -0.1% -0.3%
Housing starts 1.211 million 1.215 million
Durable goods orders 0.8% 0.7%
Consumer confidence index 121.3 120.3
New home sales 578,000 621,000
Gross domestic product 0.4% 0.7%
*Subject to revision
In the April contest, Sweet had the most accurate forecasts among 47 forecasting teams on two of the 11 indicators we track — the consumer price index and the trade deficit. On six others — nonfarm payrolls, housing starts, durable goods orders, consumer confidence, retail sales, and industrial production — his forecasts were among the 10 most accurate.
With the first four months of the year in the books, Sweet is leading the contest for the 2017 Forecaster of the Year, which has been won by Jim O’Sullivan for the last six years in a row. O’Sullivan, of High Frequency Economics, is hot on his heels.
The runners up in the April contest were Richard Moody of Regions Financial, Ted Wieseman of Morgan Stanley, Jan Hatzius’s team at Goldman Sachs, and Gus Faucher, the new chief economist at PNC Financial.
The forecasts MarketWatch publishes in our Economic Calendar are the median forecasts of the 15 forecasting teams that have done the best in our contest over the preceding 12 months, plus the forecast of the most recent winner of the Forecaster of the Month. Our enhanced consensus is much more accurate than the Bloomberg consensus that’s widely followed.
The economists in our consensus forecast are: Jim O’Sullivan of High Frequency Economics, Spencer Staples of EconAlpha, Ryan Sweet of Moody’s Analytics, Sam Coffin at UBS, Christophe Barraud at Market Securities, Avery Shenfeld’s team at CIBC, James Sweeney’s team at Credit Suisse, Ian Shepherdson at Pantheon Macro Economics, independent forecaster Brian Jones, John Silvia’s team at Wells Fargo, Stephen Stanley of Amherst Pierpont Securities, Paul Ashworth at Capital Economics, Jan Hatzius’s team at Goldman Sachs, Brian Wesbury and Bob Stein at First Trust, and Richard Moody at Regions Financial.
Source: MarketWatch.com, Article Link