The U.S. economy is showing more spring in its step as the winter slowdown gives way to acceleration in consumer spending, industrial production and job creation. A combination of pent-up demand from the winter months, a strengthening labor market, stock and home-price gains, and less concern about debt are giving consumers the confidence they need to go ahead and spend a little more freely. The drop in initial jobless claims over the last two weeks to new lows for this expansion reveals employers are gaining confidence in the U.S. economy. We expect monthly non-farm payrolls gains to average over 200K jobs a month in the second quarter. Industrial production increased strongly in March up 0.7 percent – the second consecutive month of robust gains.
This sets the economy up for a solid bounce in the second quarter. We have bumped up our forecast for real GDP, consumer spending, and job growth in the second quarter as a result. We now expect second-quarter real GDP at a healthy 3.3 percent annualized, with real consumer spending rising at a solid 3.2 percent pace. The bad news is the drag from a slower pace of business inventory growth and a large quarterly drop in U.S. exports, foreshadowed in the latest trade report, will subtract about 1.7 percentage points from U.S. GDP growth in the first quarter. We have lowered our estimate of first quarter real GDP growth by three tenths to 1.0 percent annualized.
So does stronger growth mean higher inflation? Import prices, producer prices, and consumer prices all increased more than analysts expected last month, leaving a faster rate of inflation in the first quarter. Crude oil prices have firmed over the last month. West Texas Intermediate oil prices jumped over $104 dollars a barrel recently; up 10 percent in the last three months. Food prices are also on the rise. The combination of poor winter weather delaying the spring planting season and drought in California has pushed up agricultural futures prices. Corn, wheat, and soybean prices are up more than 15.0 percent over the last three months.
The Federal Reserve, which has been concerned about inflation being too low, would welcome a little more inflation. However, energy and food categories are notoriously volatile and prices could reverse as quickly as they have increased. What is a more interesting question is will higher prices and a tighter labor market start to prompt employers to increase nominal wages. So far there is little sign of it in the wage data, though the April Beige Book report did mention shortages of skilled labor in many areas of the country. The Dallas district cited several reports of upward wage pressures, and the San Francisco district noted increases for certain occupations and in certain areas. Despite these emerging examples of spotty wage increases, we expect the recent spell of inflation will again prove temporary and our outlook remains one of only gradual increases in inflation over the forecast horizon.
To find out more, check out this week’s US Outlook Report.