June 17, 2014 / 3:01 PM / 6 years ago

U.S. economic growth sustainable, rates to rise in third quarter 2015

WASHINGTON (Reuters) - The U.S. economy is on a self-sustaining growth path that should allow the Federal Reserve to start raising interest rates in the second half of 2015, according to a Reuters survey of economists.

The sun rises to the east of the U.S. Federal Reserve building in Washington, July 31, 2013.REUTERS/Jonathan Ernst

Despite trimming growth estimates for 2014 because of a dismal first quarter, nearly all of the 48 economists in the survey said the recovery was durable given a decline in uncertainty over fiscal policy and a pick-up in job growth.

“The pieces are in place for a sustained pick-up in activity, and the successful transition to self-sustaining growth will remove one layer of uncertainty and provide the necessary condition for the Fed to consider raising rates,” said Millan Mulraine, deputy chief economist at TD Securities in New York.

The survey forecast the economy growing 2.2 percent this year, down from a May projection of 2.5 percent. The median growth forecast for 2015 held at 3.0 percent.

The modest 2014 projection reflects a contraction in the economy in the January-March period, when activity was held back by an unusually cold winter. The government said last month that gross domestic product tumbled at a 1.0 percent annual rate in the first quarter, and many economists expect that already cheerless figure to be revised sharply lower.

While growth is expected to rebound to a rate of about 3.6 percent in the second quarter, GDP growth in the first half of the year will probably come in at just over a 1 percent pace.

Gains in the labor market, which last month recouped all the 8.7 million jobs lost during the recession, were seen underpinning the recovery.

The survey forecast non-farm payrolls expanding by an average of 234,000 jobs per month in the second quarter and maintaining a solid pace of growth through 2015.

It forecast the unemployment rate averaging 6.3 percent this year and falling to an average of 5.8 percent in 2015.


“The collective psyche has improved. We can see that in the various measures of consumer sentiment and in business sentiment as well,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

“This is very important because businesses will have to continue to hire and invest to keep the economy chugging along.”

While the survey forecast tepid wage growth through next year, economists cautioned that a tightening jobs market could yield an upward surprise in average hourly earnings.

With labor market slack easing, the Fed is expected to start raising its benchmark interest rate in the second half of next year. Most economists say the U.S. central bank will likely push overnight rates up to 0.5 percent from their current range of zero to 0.25 percent when it makes its first move.

The Fed, which is already scaling back the amount of money it is injecting into the economy through monthly bond purchases, has held rates near zero since December 2008.

The survey forecast consumer prices, excluding food and energy, bumping against the Fed’s 2 percent target in the fourth quarter of this year and hitting the target thereafter.

The core Consumer Price Index was seen averaging 1.9 percent next quarter. It was then forecast rising to 2.0 percent in the final three months of 2014 and holding at that level for the next three quarters.

“If we do get this strong growth that we are forecasting and a move up in inflation, that might get the Fed to start raising rates sooner and be a bit more aggressive,” said Scott Anderson, chief economist at Bank of the West in San Francisco.

Polling by Hari Kishan and Sarbani Haldar in Bangalore; Editing by Sofina Mirza-Reid and Chizu Nomiyama

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