by The Federal Reserve’s long-anticipated rate hike yesterday –its first in 10 years — came amid worry from some that moving the federal funds rate up from zero could slow U.S. economic growth. The U.S.’s underwhelming post-financial crisis recovery provides some support for that pessimism: nominal GDP growth has averaged just 3.75 percent despite the benefit of a near-zero interest rates, a long-depressed dollar and a dropping unemployment rate. Might the situation turn worse with higher interest rates? Credit Suisse has a different outlook. The bank predicts that U.S. nominal GDP growth will accelerate to 4 percent in the first quarter of 2016 and hit 5.1 percent by the end of that year. (Real GDP growth is expected to rise to 2.7 percent in 2016, up from 2.1 percent in the third quarter of 2015.) The bank is confident in that growth, says Chief Economist James Sweeney, because of the emergence of several economic trends that the Fed hike is unlikely to disrupt. “We’re actually accelerating even with this tightening of conditions,” says Sweeney, echoing an argument he made at Credit Suisse’s 2015 Quantitative Conference in early December. “The underlying economic health of the U.S. has changed.” In the five years following the Great Recession, gains were concentrated in certain pockets of the U.S. economy, such as the energy and the financial sectors.
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The Federal Reserve’s long-anticipated rate hike yesterday –its first in 10 years — came amid worry from some that moving the federal funds rate up from zero could slow U.S. economic growth. The U.S.’s underwhelming post-financial crisis recovery provides some support for that pessimism: nominal GDP growth has averaged just 3.75 percent despite the benefit of a near-zero interest rates, a long-depressed dollar and a dropping unemployment rate. Might the situation turn worse with higher interest rates?
Credit Suisse has a different outlook. The bank predicts that U.S. nominal GDP growth will accelerate to 4 percent in the first quarter of 2016 and hit 5.1 percent by the end of that year. (Real GDP growth is expected to rise to 2.7 percent in 2016, up from 2.1 percent in the third quarter of 2015.) The bank is confident in that growth, says Chief Economist James Sweeney, because of the emergence of several economic trends that the Fed hike is unlikely to disrupt.
“We’re actually accelerating even with this tightening of conditions,” says Sweeney, echoing an argument he made at Credit Suisse’s 2015 Quantitative Conference in early December. “The underlying economic health of the U.S. has changed.”
In the five years following the Great Recession, gains were concentrated in certain pockets of the U.S. economy, such as the energy and the financial sectors. But in the last two years, a different picture has emerged. Starting with the labor market: In addition to the widely-reported steady declines in the unemployment rate, the number of job openings have jumped sharply to levels last seen pre-crisis, in 2007.
While hourly wage growth isn’t all that impressive—it was up 0.2 percent in November and 0.4 percent in October—total nominal labor income, or the sum of all of workers’ compensation, has seen more significant growth since 2013, rising above its post-crisis trend of 4.5 percent. Hourly wage growth, meanwhile, could see more meaningful increases if unemployment rates continue their downward trend.
Even without significant wage growth, Americans are spending more. Core retail sales — which exclude auto and some gas sales — rose 0.5 percent in November, beating the 0.4 percent consensus. But Credit Suisse analysts note that core retail sales figures could be even higher if all gas sales were excluded. “Given that gasoline sales are around 2 percent of our total consumption, if (the gas price) falls by 50 percent, that’s actually a big drag,” says Sweeney. “It pollutes the data.” If adjusting for the impact of gas prices, consumer spending rose at an annualized rate of 4.5 percent, up from 4 percent before 2013.
Americans are also borrowing more. After falling to just under $10 trillion in 2013, total household debt is now above $12 trillion. An analysis by Sweeney and fellow Credit Suisse economists Zoltan Pozsar and Xiao Cui shows that although debt is growing faster among consumers with higher credit scores, the rising debt trend also includes borrowers in states hit hard by the housing crisis. The return of credit growth, say the analysts, “marks an important threshold” in the recovery of the U.S. economy.
Lastly, the U.S. domestic services sector, as measured by the Institute of Supply Management’s non-manufacturing Purchasing Manager’s Index, has expanded every month for nearly six years. The sector, says Sweeney, has shown “momentum that it hasn’t had in a long time.”
Many of the trends indicating improving economic growth move on a low-frequency cycle, which bode well for their likelihood to withstand any impact from Fed rate hikes. “They do the same thing for years in a row,” says Sweeney. “A 25 or 50 or 150 basis point change in the Fed funds rate is unlikely to disrupt these developments.”
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