The economy should grow at an annual rate of 3% over the remainder of 2014, despite a slow start to the year, according to the latest forecasts from the staff of the New York Federal Reserve Bank.
The forecast is anchored by several underlying factors, including a restoration of household wealth – due largely to rising home prices – the ending of the household debt deleveraging process, reduced fiscal headwinds at all levels of government, and improved growth prospects in the euro area.
The forecast puts average monthly payroll gains at 225,000 for the rest of 2014 and 275,000 in 2015. GDP growth also is expected to be 3.5% in 2015, with inflation hitting 1.6% by the end of 2014 and 1.8% by the end of 2015.
With stronger employment growth, the staff forecast the unemployment rate to decline to about 6% by the end of 2014, and then to between 5.25% and 5.5% by the end of 2015. “This projection anticipates that, as the labor market improves, the labor force participation rate will bottom out in the near future and then rise to 63.4% by the end of 2015,” they added.
On the inflation front, the staff forecast anticipates that inflation will rise to 1.6% by the end of 2014 and to 1.8% by the end of 2015.
“As the amount of slack in the U.S. economy gradually subsides, putting less downward pressure on inflation, the gravitational force of well-anchored inflation expectations will slowly pull the inflation rate back toward the FOMC’s longer-run goal for inflation,” the report states.
Risks to the forecast for 2014 are largely to the upside, according to the report, as depressed spending on consumer durable goods, housing and business fixed investment could be sparked by the economy’s underlying strength. The key downside is that global demand could be weaker than expected.
The report also notes that potential GDP growth could be lower than expected in 2014 and 2015, which would mean a more protracted period of low inflation and excess slack in the economy.