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TD Economics: Consumers in the Driver's Seat

American economy to grow by 3.0% in 2015 and 2.8% in 2016

Consumers are set to take the lead in pushing forward American economic growth, according to a new report by TD Economics, an affiliate of TD Bank, America's Most Convenient Bank®.

"With job growth at its highest rate in 15 years and gasoline prices at the lowest in six years, conditions couldn't be better for household spending," says TD Bank's Chief Economist, Craig Alexander. "Increases in real purchasing power give households the ability to increase spending while still meeting their saving goals."

From 2.4% in 2014, TD Economics projects economic growth of 3.0% in 2015 and 2.8% in 2016. The unemployment rate is expected to fall to 5.1% by the end of 2015, from its current level of 5.5%.

Jobs, jobs, jobs
The job market offers the best reason for optimism over the next year. More than 3.2 million jobs were created in 2014, the highest annual gain since 1999. Employment growth has continued to surprise to the upside – over 1.2 million jobs were created in the last four months alone.
"The strength in job growth is echoed in a significant rise in the number of job openings, new hires, and quits," says Alexander. "The increase in labor market turnover implies a strong foundation for future job growth. Rising confidence stretches from employers who are more willing to take a chance on new hires to employees who are increasingly willing to look for new opportunities."

The improvement in job growth, in combination with falling inflation, has led to a strong acceleration in income growth. Inflation-adjusted disposable income rose 4.2% year-over-year in January. "This is likely to continue over the remainder of this year, keeping the fire lit under spending growth," says Alexander.
The American economy is in a league of its own
The strong prospects for domestic spending set America apart from the rest of the world. Among advanced economies, only commodity-producing countries like Canada and Australia have kept pace with the United States. With the plunge in prices, the lead pack is thinning.

"The good news is that economic prospects in Europe have turned up, aided by plunging energy prices, a falling currency and continued support from the European Central Bank," says Alexander. "Still, economic growth in Europe will pale in comparison to the United States."

Unfortunately, the good news stories are few and far between elsewhere in the world. In both Asia and South America, growth is set to decelerate over the next year. In fact, China will continue to slow over the next several years, as policy makers reconfigure their economic growth model and try stem imbalances.

"With little in the way of faster global growth outside of the United States, exports have limited upside. At the same time, the close to 20% rise in the trade-weighted dollar will mean higher imports from abroad," Alexander said. "This is good news for the rest of the world, but will mean a challenging environment for the nation's exporters."

The Fed is in no rush to tighten policy
The improvement in economic growth and strength in job creation mean that the Federal Reserve is moving closer to raising interest rates. However, with soft inflation and the headwind from the dollar, the Fed will be measured in its approach. "The key message that came from the Fed's last meeting was that even as the Fed begins moving rates upward, they will not go quickly," says Alexander.

TD Economics expects the first hike in the fed funds rate to come in September, with rates settling at 0.75% by the end of this year and 1.25% by the end of 2016.
www.td.com

 

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