With U.S. Economic Growth Surging, What’s in Store for 2015?

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Home / With U.S. Economic Growth Surging, What’s in Store for 2015?

The Clinton presidency demonstrated how a strong economy solves most economic problems. Is U.S. growth today poised to replicate that era? Credit: Federal Reserve.

Courtesy of recent data released by the Commerce Department, the excruciatingly slow U.S. economic recovery — five long years in the making — may finally have taken on some serious lift.

On December 23rd, the U.S. Commerce Department announced that third-quarter GDP grew at a 5.0% annualized rate. The reported increase was the fastest pace since the third quarter of 2003, and was a substantial upward revision from earlier estimates of 3.5% and 3.9%.

“America’s resurgence is real,” said President Barack Obama during a recent speech at Central High School in Phoenix, Arizona. “Now that we’ve got some calmer waters out there, we can make sure that the tide starts lifting all boats again.”

Is the economy actually poised for a period of strong growth?

The Economic Recovery Was Long Predicted to be U-Shaped

The prospects for a quick recovery from the sharp economic downturn were long ago considered remote. “I believe that the basic scenario is going to be one of a ‘U-shaped’ economic recovery where growth is going to remain below trend,” said Nouriel Roubini, chairman of Roubini Global Economics and a New York University professor, back in 2009. “Especially for the advanced economies, for at least two or three years.”

Following the end of the recession, economic growth was indeed tepid. During the first three years of the recovery, GDP increased a total of just 6.8%, or less than half the average 15.5% experienced during the first three years of the last eight economic recoveries.

Not only was Congress too gridlocked to do anything to help improve the slow growth, but due to political infighting and brinksmanship, consumer confidence remained at about half its early-2000s peak. With consumer spending representing upwards of two-thirds of the economy, the net effect was seemingly-perpetuate subnormal growth.

The Federal Reserve Stoked the Fires

While all of this was going on, the Federal Reserve was deploying waves of stimulus in a concerted long-term effort to drive down interest rates, pumping nearly $3 trillion into the U.S. economy over a five year period. Although much of the cash initially sat on the sidelines while banks, consumers, businesses and investors healed from the damage wrought by the recession, eventually it began to circulate.

Record low interest rates on savings accounts and bonds drove yield-hungry investors into the stock market, lifting it to new heights. Low borrowing costs assisted in repairing the badly-damaged housing market, causing prices to rise again. Both occurrences significantly improved personal balance sheets, helping to spur consumer confidence. Monthly car and light truck sales increased to 16.7 million units in December 2014, a nine-year high. The Consumer Confidence Index, which fell to just 38.6 in December, 2008, was back up to 92.6 at the end of 2014.

On the business side, commercial lending was booming. The U.S. Small Business Administration supported a grand total of $28.6 billion in loans in fiscal year 2014, up sharply from the depths of the recession. Meanwhile, virtually all other forms of commercial lending experienced large increases as well.

Economy: Room for Growth

In statistics, significant variances are to be expected within small sample sizes. However, as sample sizes become statistically relevant, overall results should end up somewhere close to the mean.

Since the end of World War II, U.S. gross domestic product has experienced an average growth rate of 3.3%. Even with the stronger-than-normal results of the last two quarters, the economy over the past five years has grown at an annualized pace of just 2.3%, or roughly two-thirds the average posted over nearly 70 years of data.

In short, the evidence suggests that the economy has room to maintain an accelerated growth pace for an extended period of time.

Economic Tailwinds

After years of subnormal economic activity, a number of economic factors are in play to fuel strong growth:

  • Interest rates remain low.
  • Personal wealth is increasing.
  • Business investment is up.
  • Oil prices have fallen sharply.
  • The dollar is strong.
  • Inflation remains low.
  • Budget deficits are shrinking.
  • Consumer confidence is on the rise.

There are, of course, any number of shocks that could derail the economic recovery and slow (or even reverse) growth. However, it appears likely that the growth of the U.S. economy will outpace that of other Western nations, and will continue to attract capital and investment from around the world.

The massive, long-term influx of global capital should serve to further the advance of stocks, real estate values, and the U.S. economy as a whole.

Economic Expectations for 2015

Most economists predict the U.S. will enjoy solid growth in 2015.

Although the Confidence Board estimates growth to reach just 2.6% in 2015, many economists expect it to surpass 3%, with others still revising their forecasts in the wake of the last two quarters and the sharp decrease in oil prices. Meanwhile, inflation is predicted to be nearly non-existent and although interest rates are anticipated to inch upward, they will still remain low by historical standards.

Meanwhile, the official unemployment rate should dip below 5.5% by the end of the year. Arguably a misleading figure since the labor force participation rate is near historic lows, it remains on a positive trend line, with personal income on the rise.

In short, after five years of economic malaise, it’s about time the economy bounced out of the doldrums and flexed its muscles. There is little question of sustainability, as virtually all the data points to an impending period of above-average growth. As always, it’s the politicians who like to throw cold water on a hot economy.

As Chester Bowles once said, “Government is too big and too important to be left to the politicians.”

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