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Source: Economic Forecasting Center
Consumers were cautious spenders on discretionary items during the first quarter due to the sequester and expiration of the payroll tax cut. Consumer consumption accounted for 3.2 percent of GDP during the first quarter. Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University (GSU), predicts that figure will decrease to 1.9 percent during the second quarter and fall further to 1.7 percent during the third quarter of this year.
While consumer spending remains modest, the main problem facing the nation’s economy revolves around the federal budget, said Dhawan during his presentation at GSU’s student center the morning of Wednesday, May 22.
“The biggest [question] is will we have a budget by fall of this year,” asked the forecaster. “I may be an optimistic fool, but I have a presumption that we will.”
In late March, the Democrat-controlled Senate passed its first formal budget proposal in four years. The non-binding plan for the 2014 budget calls for $1 trillion in tax increases. While the Senate proposal effectively reduces the deficit over 10 years, it stands in sharp contrast to the House budget proposal.
A budget deal would provide corporations with a measure of certainty about their tax rates, causing a higher rate of investment to spur expansion and increased job growth in 2014 and 2015.
The U.S. labor market will add 130,000 jobs per month on average this year, predicts Dhawan, before improving to 160,000 jobs per month in 2014 and further to 230,000 jobs per month in 2015. However, he anticipates the national unemployment rate will not drop below 7 percent until late 2015.
The bottom line is Dhawan is not expecting a great acceleration in economic growth anytime soon. He described the current economic footing as “The Great Disconnect” in reference to the gap between rising stock prices and lackluster revenue growth at the companies that make up the Dow Index.
According to a report from the Economic Forecasting Center, if current job growth goes as the veteran economist predicts, then consumer demand will continue to increase, ultimately bridging the gap between stock prices and corporate revenues. If those stimulants are in place, then consumers will do their job and spend.
“Americans are not frugal. We know how to shop and how to eat,” said Dhawan.
Source: Economic Forecasting Center Real GDP grew by 2.5 percent during the first three months of the year, but will only grow by a mere 1.5 percent in the second half, predicts Dhawan. This will give 2013 an annual average growth of 1.6 percent (see chart). He also expects real GDP to expand by 2 percent during 2014, and a strong 2.9 percent in 2015.
A higher rate of investment will occur in 2014 and 2015, producing expansion and jobs at stronger rate, emphasizes Dhawan.
“This outcome will make for a strong, self-sustaining recovery.”
— Brittany Biddy