Forget what you’ve been reading in media reports about a possible June rate hike by the Federal Reserve, according to Georgia State University’s Rajeev Dhawan, and expect that Fed Chair Janet Yellen and the FOMC will wait until later, say March 2017 for an interest rate increase. Dhawan is director of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business, and made these remarks at a recent quarterly forecast conference.
“The Federal Open Market Committee (FOMC) dot charts are of interest to the press for their noise potential,” said Dhawan, “These are submitted weeks in advance of the meeting and as such are purely opinions and not policy projections, resulting in confusion.”
As evidence, he points to comments in the April FOMC that contradict the idea of a June rate hike. “The FOMC said consumer sentiment was high, which is true, but it has been moderating since last fall,” Dhawan said. Combined with extreme volatility in the stock market and the political uncertainty surrounding the presidential primaries and upcoming elections, “the momentum indicator for confidence is not up, but down.”
The FOMC also pointed to household income gains as a positive, but Dhawan argues that although gains are solid compared to the Great Recession, they are still half the size of those before it. But deep discounts from automakers have encouraged a dramatic increase in vehicle sales since 2014.
“This is bad news for shopping malls and retail centers,” the forecaster said, “because consumers are scrimping on discretionary spending to service their auto loans in the face of less than stellar income gains.”
As apartment building mania cools, housing demand has also. Already a historically subpar recovery, lack of demand for and availability of affordable housing suggests waning momentum for the potential of a June rate hike.
But the key, Dhawan said, is weak business investment for the past nine months. “Presidential election rhetoric creates uncertainty that holds back investors, plus the damage from last year’s falling oil prices on equipment investment is showing up in growth.” Thus, 2016 job growth will be weaker than that of 2015.
Luckily, resources released by falling oil prices were funneled into sectors more dependent on consumer demand. “As online retail sales have grown at a blistering pace, so has the need for warehouses, truck drivers and cardboard,” according to Dhawan. “The issue here will be the strength of future consumer demand, which is a function not only of prices but also of ability to buy, a.k.a. today’s job growth, which hinges on prior investment.”
Other highlights from the Economic Forecasting Center’s National Report:
- Real gross domestic product (GDP) will expand 1.5% in 2016, 2.5% in 2017 and 2.4% in 2018.
- Business investment will drop 0.9% in 2016, rebound to 4.9% growth in 2017 and 5.7% in 2018. Jobs will grow by a monthly rate of 180,000 in 2016, 193,000 in 2017, and soften to 169,000 in 2018.
- Housing starts will rise from 1.154 million units in 2016 to 1.297 in 2018. Auto sales will slowly drop from 16.8 million units in 2016 to 16.3 in 2018.
- The 10-year bond rate will rise to 2.3% by the end of 2016, then 2.8% in 2017 and 3.4% in 2018.
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