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TD Economics: American Economy Still Making Progress

Date: Mar 24, 2016 @ 07:19 AM
Filed Under: Economic Reports

Nervous investors sent financial markets on a rollercoaster ride to start this year, but the story for the American economy has not changed over the past three months according to a new report by TD Economics, an affiliate of TD Bank.

The resilience of the U.S. economy continues to shine through," says TD Bank's Chief Economist, Beata Caranci. "Ongoing job strength provides the basis for continued economic progress and gradually higher interest rates."

Led by household and business spending, TD Economics projects economic growth of 2 percent in 2016 and 2.2 percent in 2017. "While this pace may seem underwhelming, it will be more than sufficient to continue to eat up slack in the American economy, maintain upward pressure on inflation and push the unemployment rate lower. The Federal Reserve will have good cause to raise rates two more times this year, even though market participants have currently sidelined those expectations," Caranci said.

Fears in Financial Markets Rise and Fall

The year got off to a raucous start for global investors. In the span of five weeks, U.S. stock markets lost more than 10 percent of their value, oil prices plummeted to a 13-year low, and the 10-year Treasury yield fell 60 basis points. The turn in market sentiment since then has alleviated concern that recession fears could prove self-perpetuating.

"The reality is that with an aging population, the sustainable rate of economic growth is slower than it has been historically, leaving less of a margin between recession and growth. Sudden shifts in risk aversion remain a downside risk to the outlook," Caranci said.

Job Market Showing Little Signs of Strain

The most encouraging element in recent data has been the ongoing resiliency in the labor market. Job growth over the first two months of 2016 averaged 207,000, similar to its progress since the recovery began.

"The good news does not end there," Caranci said. "Drawn in by better job prospects, more and more people appear to be joining the workforce, heralding a more fulsome labor market recovery."

With job growth expected to exceed 190,000 a month over the remainder of this year, TD Economics expects the unemployment rate to fall to 4.7 percent by the end of this year and hit a low of 4.6 percent in the second half of 2017.

Inflation Turning Up, Giving the Federal Reserve Scope to Raise Rates

The continued tightening in the labor market will ensure that inflation moves toward the Federal Reserve's target of 2 percent. Inflation has in fact surprised on the upside over recent months. The core consumer price index inflation rate (that excludes food and energy) rose to 2.3 percent in February.

"This is occurring in spite of an elevated dollar and low energy prices that have been exerting downward pressure on inflation via imported goods and inputs to the production processes" Caranci said. "The dollar's influence will remain in place over the next several months, but its impact on prices will fade as the lagged impact washes out."

With both employment and inflation moving toward target, as long as global conditions remain stable, the Federal Reserve will continue gradually normalizing policy. TD Economics expects the next rate hike to come in June, with another hike likely in the second half of the year. The Federal Reserve is likely to raise rates three more times in 2017, bringing the federal funds to a target range of 1.50 percent to 1.75 percent by the end of the year.

The complete findings of the TD Economics report are available online at http://www.td.com/document/PDF/economics/qef/qefmar2016_us.pdf.

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