U.S. Forecast Update: Growth, Inflation and Central Bank Policy

Pioneer’s Head of Global Asset Allocation Research, Monica Defend, along with U.S. and Latin America Global Asset Allocation Research Economist, Annalisa Usardi, recently released an update on the U.S. economy. The update was based on the Bureau of Economic Analysis’ (BEA) release of the third and final estimates 1Q14 gross domestic product (GDP), which came in lower than expected. The forecast update focuses on three areas: growth, inflation and central bank policy. Below are some highlights from their report. To read the full report, click here.

Growth: Q1 Will Weigh on Annual Figures

On June 25th, the BEA released the third and final estimate of 1Q14 GDP, which came in much lower than expected at -2.9% quarter-over-quarter (QoQ) annualized rate after gaining 2.6% in 4Q13. While the weakness can be explained in part by the extraordinarily bad weather conditions that affected the U.S. economy this winter, important revisions were made to the underlying BEA assumptions on household health care spending for the quarter, bringing down the final contribution from Personal Consumption Expenditures, which was the sweet spot of the previous release.

Based on this final release, we have revised our expectations for growth in 2014 downward to 1.5% year-over-year (YoY). While we expect the economy to rebound in 2Q14 to a 3% QoQ annualized range and to grow at an average 2.7% QoQ annualized rate in the following quarters of 2014, this will not be sufficient to lift growth higher than the 1.5% – 2% range that we currently expect. We still think that the drivers of growth we highlighted in our initial outlook for 2014, while delayed, remain in place. However, the extent and nature of any setback should be monitored closely.

chart 1 for july macro report blog_large format

Inflation: Turning Point Reached

With respect to inflation, we expect the Consumer Price Index (CPI) to average 1.8% YoY, hovering around 2% in the next quarters. Given the dynamics we expect for import prices, Producer Price Index (PPI) and labor costs, we are not yet seeing dramatic upward pressures on CPI, although the recent acceleration led us to increase the average projected for the year.

chart 2 for july macro report blog

Central Bank Policy: Tapering to Continue

From July 2014, the Federal Reserve will be buying $15 billion of mortgage-backed securities and $20 billion of long-dated Treasuries each month. This is down a cumulative $50 billion from the 2013 pace, after having reduced asset purchases by $10 billion at each of its last five meetings, starting with December 2013.

In its June statement, the Fed  noted that “growth in economic activity has rebounded in recent months” and forecasted that “economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually” (unemployment 6.1% in June). The Fed specified that “asset purchases are not on a preset course” and further reassured on interest rates, reaffirming its expectation for low interest rates going forward and further stating that “a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 0.25% target range, the committee will assess progress – both realized and expected –towards its objectives of maximum employment and 2% inflation”.

The next scheduled Fed meeting is on July 30; there is no scope for further cuts. Tapering of quantitative easing (QE) is likely to continue going forward if the economy develops as the Fed expects, and completely wind down by October 2014.

About Giordano Lombardo

Giordano Lombardo is CEO and Group CIO of Pioneer Investments. Prior to his appointment as CEO in February 2015, he held the position of Deputy CEO since 2012. He has been Group CIO, responsible for global investment activities, since 2001 and has been with Pioneer's parent company, UniCredit Group, for over 20 years.
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