Bank of the West U.S. Outlook Report for February 27, 2015

US Outlook Report: Keeping the Faith on the U.S. Economy

The U.S. economy continues to perform in-line with our forecasts. U.S. real GDP growth cooled slightly to 2.2 percent in the fourth quarter, but appears to be growing at around a 2.4 percent annualized pace in the first quarter.  However, worse-than-normal seasonal weather in much of the country is weighing on the incoming data as it did last year. An analysis by Macroeconomic Advisers out of Saint Louis puts the adverse weather impacts on the U.S. economy in the first quarter at -0.4 percentage points of real GDP. Add to that, the potential for the West Coast port slowdown to subtract another 0.1 to 0.2 percentage points, and U.S. GDP growth would be trending at around 2.8 percent or better over the first quarter of this year.

Headwinds from lower oil prices, a strengthening dollar, and weak global demand have become visible in the earnings of some large international companies, like Hewlett-Packard. These companies are likely to accelerate cost cutting by reducing non-essential staff and pulling in the reins on business investment. The recent weakness in manufacturing PMI’s for January and February are a reflection of these headwinds.

But all of this has already been factored into our Q1 forecasts.  We don’t see anything outside the box that would change our fundamental view of the U.S. economic or interest rate outlook for this year.  If anything, the news on the international front has improved recently, reducing the risk of downside contagion from abroad.

The January CPI data turned deflationary as we expected, but with better-than-expected resilience from core-consumer prices, which edged up another 0.2 percent last month. U.S. deflation remains contained in only a handful of categories, energy, commodities, transportation, and apparel. The year-on-year core-CPI inflation held steady at 1.6 percent. While core-consumer inflation remains below the Fed’s 2.0 percent target range. If the headline inflation number only stops plunging in the months ahead, it could give the Federal Open Market Committee the confidence it needs to initiate its liftoff in June.

Finally, an encouraging nugget on future U.S. business investment- U.S. non-defense capital goods orders excluding aircraft broke a four-month losing streak in January, rebounding more than the consensus expected on the month. This bolsters the case that the recent sharp drop in business investment could be short-lived and won’t fundamentally alter the sanguine economic outlook for this year.

To learn more, check out this week’s US Outlook Report.