The American economy is showing renewed vigor and is poised for a pickup in growth, according to a report released today by TD Economics, an affiliate of TD Bank.
"Job growth is gaining speed and confidence is rising," says TD Chief Economist, Craig Alexander. "The strength in job growth will support consumer spending and energize housing demand, shifting the economy into third gear."
After averaging 2.2% in 2014, the economy is forecasted to grow by 3.0 % in 2015. With faster growth, the unemployment rate will continue to fall, reaching 5.5% by the end of next year.
Strong Job Growth Expected to Continue
Nowhere are the signs of rising momentum more evident than in the U.S. job market. Between January and August, the economy generated over 1.7 million jobs, nearly 300 thousand more than the average over the previous three years.
What is more, the acceleration in job growth has been accompanied by broader signs of labor market improvement. Businesses are reporting high levels of job openings and increasing confidence in the durability of the economic recovery.
"This bodes well for future job and income growth," notes Alexander. "Over time, the level of job openings will translate into higher wages and higher employment. We expect average monthly job growth to exceed 200,000 over the next year, continuing on the strong trend observed so far this year."
Rising Incomes Will Support Consumer Spending and Housing Market
The improvement in job and income growth sets the stage for a rise in consumer spending. This has been one of the missing links in the recovery so far. Since its trough during the recession in 2009, real consumer spending has grown at an annual average rate of 2.2%, well below the 3.1% rate it averaged in the five years prior to the recession.
"Much of the disappointment in economic growth to-date has been due to the continued hangover from the housing crash and financial crisis," says Alexander. "Households have been reluctant to spend in the face of falling home values and next to no offset in the way of salary increases."
Stronger job and income growth will also support the housing market.
"The dearth of new household formations is strongly related to the lack of job opportunities among young people," says Alexander. "As employment rises, the housing recovery should also pick up speed as these first-time buyers come back into the market."
The Federal Reserve Will Begin Raising Interest Rates in 2015
With the expected improvement in growth over the next year, the economy is likely to have shown sufficient progress for the Federal Reserve to begin raising short-term rates.
"After almost seven years of zero interest rates, the recovery in 2015 will have finally moved to a stage where rates can begin to move higher," says Alexander. "But, this will occur gradually."
TD Economics expects the Federal Reserve to begin its rate hiking cycle mid next year and bring the fed funds rate up to 0.75% by the end of the year. By the end of 2016, the fed funds rate will likely only be at 1.75%, which is still a highly stimulative monetary setting.
TD Economics provides analysis of global economic performance and forecasting, and is an affiliate of TD Bank, America's Most Convenient Bank®.
Click here to view the complete findings of the TD Economics report.