COLUMBUS, Ind. – Industry forecaster FTR’s senior economist Bill Witte takes a slightly dimmer view of the U.S. economy than he did several months ago, but is still projecting 2.5% GDP growth this year.
In a webinar to provide an economic mid-year review, Witte highlighted some risks he sees facing the U.S. economy, which continues to chug along at a strong pace, with 3.2% growth in the first quarter. While that’s an impressive number, Witte noted 0.6% of that growth was related to inventory increases, which won’t continue. Removing that number brings growth to about 2.6%, but consumption, business investment and housing – primary economic strength indicators – were all down, while government spending and trade were up.
With government stimulus packages winding down and the trade deficit likely to return to more normal levels, Witte says the economic growth isn’t a strong as it appears at first glance.
“So, it’s certainly a cloudy situation,” he said.
However, he pointed to the strong labor market as something to be encouraged by, with unemployment dropping to 3.6% in April – the lowest level seen in the U.S. since December 1969.
Looking ahead, Witte expects to see private domestic demand – consumption, investment and housing – to bounce back. But there are risks on the horizon.
“The one I’m worried most about, the one that would cause big problems, is an inflation surprise,” Witte explained. “Inflation has been running very low and that is a big puzzle for economists.”
Normally, an economy that’s close to capacity with a tight labor market would see more upward pressure in prices.
“We haven’t really seen that,” said Witte. “We’ve seen a little increase in wages, but that isn’t feeding through into prices. Prices have been very well contained.”
The risk is that if inflation rises, the Federal Reserve is likely to raise interest rates, do so too aggressively, and cause a recession.
“Given that we don’t have any hint of the actual inflation materializing, I’m not sure how strong a possibility it is, but it’s a worrisome possibility,” Witte said.
Other risks involve fiscal policy programs. Witte said it’s unclear what will replace the government stimulus package that’s winding down, and the government’s debt continues to climb.
Internationally, threats include a trade war with China and weakening economies in China and Europe.
Lastly, Witte cited the domestic political situation as a risk. He summed it up this way: “It’s bad, I think it’s getting worse, and I don’t want to talk about it.”
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