Phil Castle, The Business Times
Moderate growth is expected to continue in the United States even as labor conditions improve, according to a mostly upbeat presentation by an economist and executive with the Federal Reserve Bank.
A comparatively strong U.S. dollar could curb exports and in turn manufacturing, though. And slower gains in productivity and the labor force have lowered long-term projections for growth, said George Kahn, an economist and vice president with the Federal Reserve Bank of Kansas City.
While the Federal Reserve likely will slowly raise its key short-term interest rate, monetary policy will remain accommodative, Kahn said during his presentation at an economic forum in Grand Junction.
Moderate economic expansion should continue through 2015 and into 2016, Kahn said.
Gross domestic product, the broad measure of good and services produced in the country, increased at an annual rate of 3.7 percent in the second quarter. But a more moderate annual growth rate of between 2 percent and 2.5 percent is expected going forward, he said.
The long-term forecast is for 2 percent growth in GDP based in part on slower growth in productivity as well as an aging labor force from which the baby boom generation is retiring, he said.
Labor conditions are expected to continue to improve as the U.S. unemployment rate retreats to around 5 percent, Kahn said. Nonfarm payrolls have increased an average of more than 200,000 a month for the past year.
While some numbers suggest the U.S. is moving toward what’s considered full employment, Kahn said he believes there’s still some slack in the labor market given the number of people who’ve left the work force and those who are working part-time when they’d prefer full-time positions.
Consumers have promoted economic growth with increased spending fueled by improving labor conditions and rising wages and income. Consumer confidence also has improved even as household wealth has returned to pre-recession levels, Kahn said.
Declining oil and natural gas prices have had a greater affect on the United States than in the past because of increased production in the country, Kahn said. But lower energy prices still constitute a “net positive,” he said, because the savings to consumers have bolstered spending on other goods and services.
If there’s a headwind to continued economic growth, it’s the appreciation of the U.S. dollar against foreign currencies, Kahn said. He attributed the stronger dollar to easing monetary policies in other countries as well as the allure of the dollar as a safe haven in the global economy.
A stronger dollar in turns makes U.S. goods and services more expensive and can curb exports, he said. Manufacturing activity related to those exports also can slow.
Inflation remains below the Federal Reserve target rate of 2 percent, but is expected to increase in part because of higher wages, Kahn said.
Given what’s projected as economic growth and higher inflation rates, the Federal Reserve is expected to increase its key short-term interest rate.
That rate remains at between 0 percent and 0.25 percent, but is expected to slowly increase toward what’s projected as a long-term rate of 3.5 percent, Kahn said. It’s uncertain, though, whether rate increases will begin later this year or next year.