Federal Reserve lowers US economic growth estimate for 2014

19th June 2014

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Just days after the International Monetary Fund (IMF) cut its forecast for US economic growth, the Federal Reserve has now reduced its own estimate.

On the back of the severe winter weather which saw the world’s largest economy fall 0.1%, on an annualised basis, in the first three months of the year – after gaining 2.6% in the final quarter of 2013 the country’s central bank now expects growth to reach between 2.1% and 2.3% in 2014, down from its previous March prediction of 2.8% to 3%.

The Fed however said that key indicators show that economic activity has rebounded in recent months. But in a statement on the matter, it added: “Labor market indicators generally showed further improvement. The unemployment rate, though lower, remains elevated. Household spending appears to be rising moderately and business fixed investment resumed its advance, while the recovery in the housing sector remained slow.”

Federal Reserve chair Janet Yellen

Federal Reserve’s Janet Yellen

The organisation has continued to ease back its electronic money printing, or quantitative easing programme, by another $10bn a month to $35bn.

In regards to official job numbers, May’s better-than-anticipated 217,000 increase in non-farm payrolls, cheered markets as the gains were enjoyed across a wide range of sectors and industries. Recent weeks have seen the S&P 500 reach successive new highs and in the past three months after a shaky start to the year, the index has risen 3% in sterling terms.

Commenting on the Fed’s update, Paul Ashworth, chief US economist at Capital Economics said: “Since we recently revised down our own forecast from 2.8% to 2.2%, we’re not going to quibble with that change. It still implies GDP growth will average roughly 3.0% at an annualised pace over the final three quarters of this year. At the same time, officials also reduced their projections for the unemployment rate at end-2014 to between 6.0% and 6.1%, from 6.1% to 6.3%.”

Earlier this week the IMF slashed its own US economic growth forecast for 2014, noting that it does not expect the US to reach full employment until the end-2017. But like the Fed, it conceded that more recent data suggested that a meaningful rebound in activity was now underway and growth for the remainder of this year and 2015 should exceed potential.

But it added that this renewed dynamism provides only a partial offset to the weak first quarter and as a result, the IMF anticipates US GDP growth of 2% in 2014, a 0.8% reduction, while it expects it to rise to 3% in 2015.

BNY Mellon chief economist Richard Hoey said: “The downward forecast revisions for 2014 reflect the mark-to-market of economic weakness which already occurred in the early months of this year. We believe that these mark-to-market economic revisions are occurring just as both global growth and U.S. growth are at an inflection point to a somewhat faster pace of growth than has prevailed over the last several years.  It is crucial to distinguish between the mark-to-market of what has already occurred and the prospects for growth over the next four to eight quarters, which should run at 3.5% to 4% for the global economy and close to 3% for the U.S. economy.”

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