Federal Reserve: Why It Slashed Its 2015 Economic Growth Forecast

US-EconomyIt wasn’t too long ago that the Federal Reserve told us it expected the U.S. economy to grow by three percent on average, as measured by gross domestic product (GDP). After all, with years of historically low interest rates and trillions of new dollars printed, that’s the least we could expect. But the sad reality is that now, even the Fed itself doesn’t see that kind of growth for years to come.

What the Federal Reserve Really Thinks About the U.S. Economy

The Federal Reserve has pulled back significantly on its forward guidance for the U.S. economy. The table below shows what the Fed is now predicting for economic growth.

Year GDP Growth
2015 2.1%
2016 2.3%
2017 2.2%
2018 2.0%

Data source: Federal Reserve, September 17, 2015

Three-percent GDP growth is no longer in sight! In fact, the U.S. economy hasn’t hit that threshold for a long time—not since before the Credit Crisis of seven years ago.


Two Indicators Economic Growth Will Get Worse

In the month of August, existing home sales in the U.S. economy fell 4.8% from July. The annual rate of sales of already built homes stood at 5.31 million in August, down from a lower-revised figure of 5.58 million in July. (Source: National Association of Realtors, September 21, 2015.)

And the number of first-time home buyers in the housing market remains anemic. In August, first-time home buyers accounted for 32% of all the existing-home sales. In a normal market, you would expect first-time home buyers to account for at least 40% of all existing-home sales. I have long written about this; you can’t have a healthy housing market if first-time home buyers are missing from the equation.

Next, consumer confidence, essentially a leading indicator of consumer spending, is in big trouble, as the following chart of the University of Michigan Consumer Sentiment Index clearly shows.


                                                                         Chart courtesy of www.StockCharts.com

Since the beginning of 2015, despite the Federal Reserve having kept interest rates at historic lows, consumer confidence has been plummeting. This is a very concerning trend.

U.S. Economy’s Outlook: Dismal

Dear reader, we are experiencing the worst post-recession recovery I have ever seen. Aside from the housing market and consumer confidence issues I spoke about above, the underemployment rate (that includes people having given up looking for work and those with part-time jobs because they can’t get full-time work) has been stubbornly above 12% for years now. And the number of people in the workforce is at a multi-decade low.

I’m still not ruling out a recession in the last quarter of 2015 or early 2016. All this talk from the Federal Reserve about raising interest rates may be very short-lived if it needs to reverse policy and go back to its easy-money days as the economy gets worse in 2016.