Slow growth forecast weighs on Fed rate hike decision

Dennis Lockhart of the Atlanta Federal Reserve
Lucas Jackson | Reuters
Dennis Lockhart of the Atlanta Federal Reserve

The U.S. economy is barely growing, but it's expected to keep moving ahead fast enough to prompt Federal Reserve officials give serious thought to raising interest rates when they meet next week.

That view was offered up by Atlanta Fed President Dennis Lockhart on Monday to a group of business economists, who issued a fresh forecast that calls for continued subpar growth.

Despite the slow advance of overall economic expansion, Lockhart pointed to other signals that it may be time to nudge rates higher.

"If 1.6 percent inflation and 4.9 percent unemployment were all you knew about the economy, would you consider a policy setting one tick above the zero lower bound still appropriate?" Lockhart said in a Monday morning address at the National Association for Business Economics.

"I think circumstances call for a lively discussion next week," he said.

While historically low inflation and jobless rates may bolster the case for higher interest rates, the recent slow pace of overall economic growth continues to give some Fed members pause.

That slow growth is expected to continue, according to the NABE's latest quarterly survey, released Monday.

The business economists expect the U.S. economy to avoid a recession for at least the next two years, but they continue to lower their projections for growth.

The group's median estimate sees gross domestic product growing at an annual rate of 1.5 percent in 2016, down from their June forecast of 1.8 percent. Their median outlook for next year sees growth picking up a bit, to 2.3 percent average annual growth.

The economists also see the pace of hiring slowing; they've cut their June forecast of 201,000 jobs per month to just 185,000 monthly payroll gains in the latest survey. They expect payroll growth to slow to 168,000 a month next year, with the jobless rate falling to 4.6 percent by the end of 2017.

The recent pickup in wage growth is expected to slow — from 2.9 percent last year to 2.6 percent this year. But the group sees wage growth picking up again next year, to 3.1 percent, rising faster than inflation both years. They expect inflation to remain tame at 1.6 percent this year, rising to 2.2 percent next year.

Lockhart told the group that recent data and contacts with business officials in his southern region leave him confident that job growth will continue and inflation will eventually rise toward the Fed's target.

Though not ruling out some of the more pessimistic arguments of his colleagues who feel the economy may be in a low-growth rut, he regards the economy as "chugging along, not stalling out."

But that sluggish growth pace may not be enough to convince others on the Fed's rate-setting committee to move ahead with a rate hike.

On Friday, Fed Governor Daniel Tarullo told CNBC he wants to see more evidence of sustained inflation before considering an interest rate increase. But he added he can't rule out a hike this year.

He said the economy also has room to create jobs, given that the unemployment rate has held fairly steady while nonfarm payrolls have increased

"No one knows where full employment is," said Tarullo, a voting member on the central bank's policymaking panel, adding that "We're not running a hot economy."

NABE economists agree, according to their latest forecast.

Most of this year's GDP growth will be driven largely by consumers, according to the survey, with household spending rising by 2.7 percent in 2016 and 2.6 percent next year. Both forecasts are up a tenth of a percent from the June survey.

But they see corporate profits going nowhere this year, with no growth at all. That's better than the 2.0 percent decline in the June survey. For next year, the group sees profit growth kicking back in at a 4.2 percent rate.

The September survey marks the fourth consecutive drop in expectations for this year's GDP growth in the group's quarterly survey.

This time, the main reason the economists cited in their scaled back forecast was the recent slowdown in business investment, as companies have pulled back on spending for new equipment or new construction.

Some of that spending decline may be due to uncertainty surrounding the presidential campaign. Half the group said concerns about the outcome of the November election have been "modestly negative" for the economy this year.

Some 56 percent said they think a win by Democratic candidate Hillary Clinton would be "mostly neutral" for their growth outlook; while 60 percent said a Donald Trump presidency would be "unfavorable" for the forecast.

The group also trimmed their expectations for the housing market, which continues its slow recovery.

"The near-term outlook for homebuilding has continued to soften," said John Silvia, chief economist at Wells Fargo Securities.

The group now expects 1.19 million new housing units to be built this year, down from the 1.21 million in the June forecast and the 1.24 million projected in March. But they expect housing starts to pick up again next neat to 1.31 million.

They also see house prices rising 5.1 percent for all of 2016.