Fed expected to cut US growth forecasts

New York

FEDERAL Reserve officials will probably cut their forecasts for economic growth when they gather again next month, though not enough to deter their intent to raise interest rates later this year.

The median respondent to a survey of 79 economists conducted by Bloomberg from May 8 to May 13 said US gross domestic product would grow 2.3 per cent in the final quarter of 2015 from a year earlier, down from the 2.7 per cent median estimate in April.

That compares with a 2.5 per cent midpoint of the central tendency of estimates submitted by Fed officials at their March meeting, the last time they issued updated forecasts. The central tendency denotes the range of estimates excluding the three highest and three lowest of the 17 policy makers' projections.

Economic data released since the Federal Open Market Committee's March forecasts have revealed unexpected weakness in the first quarter. Economists have attributed this to mostly transitory factors such as the rise of the dollar, a drop in oil prices, harsh winter weather and a slowdown at West Coast ports due to labour disputes.

Forecasting firm Macroeconomic Advisers now estimates the US economy contracted at a 0.9 per cent seasonally adjusted annualised rate in the first three months of the year. The central question now: will the slowdown prove temporary or will it persist? The arrival of the first round of April data in recent days has prompted analysts to begin marking down estimates for the current quarter as well. And economists don't necessarily expect growth over the next few quarters to make up for the surprise drop in the first quarter, unlike in 2014, when a surprise contraction in the first quarter was made up over the rest of the year.

The median respondent to the Bloomberg survey said the US will grow at a 2.7 per cent seasonally adjusted annualised rate in the second quarter, down from 3.1 per cent a month ago. The median estimate for growth in the third quarter was unchanged at 3 per cent annualised, and the median prediction for fourth- quarter growth was bumped up a mere tenth of a percentage point to 3 per cent.

"That's kind of what people have in mind: that perhaps we will get above-trend growth from now on, but unfortunately probably not fully make up for the loss that we saw relative to trend in the first quarter," said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC in Stamford, Connecticut.

Still, the Fed may continue with its plans to raise interest rates soon anyway, according to Dana Saporta, a US economist at Credit Suisse Securities USA LLC in New York. "Jobs are growing fast enough to put downward pressure on the unemployment rate," Ms Saporta said. "So, I do think they might revise down GDP, but that will not necessarily mean that all bets are off for the beginning of policy normalisation later this year."

Meanwhile, staff economists at the Federal Reserve Bank of New York have downgraded their forecast for US growth because of restrained spending by consumers and businesses and a decline in energy investment amid lower oil prices.

While they expect growth to rebound after a weak first quarter to an average annualised pace of 2.4 per cent for the rest of 2015 and 2016, "the growth rate in this forecast is below what we anticipated at this time last year". The report, released on May 8, also didn't forecast unemployment falling to 5 per cent until the end of 2016, from 5.4 per cent in April. New York Fed staff estimate the so-called natural rate of unemployment at around 5 per cent.

The staff forecast is now gloomier than the Blue Chip Economic Indicators survey of private sector economists, which predicts 2.9 per cent growth for the rest of this year and next, with unemployment at 5 per cent in the first quarter of 2016.

"Households and businesses have shown more restraint in their spending than we expected and we have lowered our projections for future spending growth from those sectors," New York Fed economists Jonathan McCarthy, Richard Peach, and Robert Rich said in a blog post on the bank's website.

"I believe that the growth prospects for the US economy over the remainder of 2015 will improve," New York Fed president William Dudley said in an April 20 speech. BLOOMBERG