Bank of the West US Outlook Report for January 9, 2015
With recent sharp swings in oil, foreign exchange, and equity markets, it appears the markets are trying to tell us something. But what? In this week’s outlook report we focus on three themes the markets have fixated on: the drop in oil, the appreciation of the U.S. dollar, and the outlook and risks for the global economy. In each case, we discuss the implications for the U.S. economy.
Is the drop in oil prices a good thing or a bad thing for the U.S. economy?
While the swiftness of the drop in oil is likely to cause some economic and financial disruption in the oil extraction industry and in states where fracking has made strong inroads, the impact on the U.S. economy is a net positive in my view.
What about the U.S. dollar? That surely will wreak havoc on our economy, right?
First, let’s put things in perspective. The dollar has strengthened around 10% on a broad trade weighted basis since June and is now nearing its peak level from March of 2009, but still remains 13% below its all-time peak of March 2002. This move in the dollar is largely being driven by the divergence of U.S. and global growth and the prospects for monetary policy in the U.S., Europe, China, and Japan.
The dollar’s strength is creating some downside risks to our forecasts for U.S. exports, manufacturing, and business investment for 2015. It has already helped push down our forecast for inflation in 2015 to just 0.9 percent. Even so, I don’t believe the negative impacts from the dollar’s move so far will be enough to change the positive dynamics lining up for consumer demand.
Will Global Recession Upset The Apple Cart?
The evolving Eurozone economic and inflation outlook is the most troubling development for the global economic and financial system in my view, and likely has the largest potential implication for the U.S. economy. It is still unclear if additional QE from the ECB, lower oil prices, and a weaker euro will be enough to stem the negative trends there.
On the bright side, economic surprises in the Eurozone have turned more positive of late. November retail sales in the Eurozone easily beat modest expectations.
But on a negative note, Eurozone deflation has officially arrived. Eurozone CPI inflation for December was -0.2% down from 0.3% in November. The drop in oil prices is complicating the ECB’s efforts to stabilize prices. If deflation becomes entrenched, it will weigh more heavily on European demand.
In the end, a full blown global recession or financial contagion that brings down the U.S. economy in 2015 still looks like a long shot to me. So, while increased financial volatility will keep the Fed on alert for potential downside risks to the U.S. outlook, it probably won’t rise to the level of concern that the Fed will need to change or delay plans to raise interest rates this year, which we still expect to begin in June.
To find out more, check out this week’s US Outlook Report.
Tags: economy