In Outlook 2015: Pain and Gains, we called for US gross domestic product (GDP) to grow by about 3 percent, with robust consumer spending offsetting economic weakness elsewhere. Our analysis highlighted external factors—especially in China and other emerging markets as the biggest downside risk—to US economic growth.
This projection will likely prove overly optimistic. Although the Bureau of Economic Analysis won’t release the official data until the end of this month, the US economy probably expanded by 2.4 percent to 2.5 percent last year.
However, our call for strong consumer spending to drive the US economy panned out. From the fourth quarter of 2014 to the third quarter of 2015, personal consumption expenditures contributed 213 basis points of US GDP growth of 215 basis points.
As we projected, the wealth effect associated with tumbling energy prices helped to stimulate record gasoline demand last summer and a sharp increase in the US Dept of Transportation’s estimate of miles driven on federal highways.
Weakness in international markets likewise exerted a significant drag on the US economy, with trade (exports minus imports) eating up 72 basis points of US GDP growth over the 12 months ended Sept. 30, 2015.
Since the end of September 2014, the US Dollar Index has rallied by about 15 percent, as the greenback has strengthened relative to most international currencies. Uncle Buck’s strength erodes the competitiveness of US exports relative to goods from countries whose currencies have depreciated. Key trading partners’ economic weakness also hits demand for US goods and services.
On the whole, investment contributed an average of 62 basis points to quarterly economic growth over the 12 months ended Sept. 30, 2015, with capital flows into residential housing adding 30 basis points.
Non-residential fixed investment likewise accounted for 29 basis points of GDP growth, a major slowdown from the almost 100 basis points per quarter averaged over the 12 months ended Sept. 30, 2015. This weakness reflects the decline in manufacturing activity and the well-documented headwinds buffeting the energy sector, two trends that have weighed on demand for industrial equipment.
The Federal Reserve and the Bloomberg consensus estimate call for the US economy to grow by 2.5 percent next year—roughly the same pace as in 2015. Meanwhile, the hive mind on Wall Street expects US GDP growth to accelerate from 2.1 percent in the third quarter to 2.2 percent in the fourth quarter and 2.6 percent in the first quarter of 2016.
These forecasts assume continued strength in consumer spending, an end to the inventory drawdown cycle, and a recovery in exports.
We regard these estimates as overly optimistic when you consider the downside risks; our outlook calls for the US economy to grow by about 1.5 percent this year. Although a recession doesn’t appear to be imminent, the risk of the US suffering an economic contraction by the first half of 2017 has increased. Accordingly, we’ll continue to monitor incoming data closely for signs of further deterioration.
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Elliott and Roger on Sep. 27, 2022