Savannah Chamber

7 1 The National Outlook 2015 Jeffrey M. Humphreys, Director Selig Center for Economic Growth University of Georgia The Terry College's national economic forecast indicates that the recovery will be sustained. The 2.8 percent rate of 2015 GDP growth will be higher than last year's 2 percent, but below the 3.1 percent average of the last 50 years. The U.S. is well positioned for faster growth courtesy of extensive restructuring of the private sector, including the cleanup of the financial sector, deleveraging by consumers, and a more favorable balance of supply and demand for residential and commercial properties. Also, most state and local governments have adjusted their spending and staffing to reflect their ability to generate revenue. The U.S. economy also will be slightly less vulnerable to economic shocks and/or policy mistakes. The three main risks to economic growth are (1) mistakes in U.S. fiscal or monetary policy, (2) oil price shocks due to supply interruptions, and (3) financial panics, potentially originating in the EU. The probability of recession is 25 percent, which is smaller than the 30 percent recession probability estimated at this time last year. In 2015, private final domestic demand and gross private domestic investment rather than federal fiscal stimulus, net exports, or changes in private inventories will be the drivers of U.S. GDP growth. Indeed, for the fifth-straight year, federal fiscal policy will be restrictive, albeit slightly less so than in 2014. The Federal Reserve's very stimulative monetary policy stance will shift to slightly restrictive when it begins to raise short-term policy interest rates in mid 2015 or later. Meanwhile, the federal government has yet to effectively address its massive structural budget problems, which is what is needed to move the national economy from sub-par to above average. One reason GDP growth will be higher in 2015 is that consumers will spend more vigorously. Real consumer spending will rise by 2.8 percent in 2015 compared to 2.3 percent in 2014. Spending on nondurable goods and services will be a primary driver, as will investment spending on new home construction. Compared to U.S. GDP growth, the GDP growth of our major currency trading partners will strengthen only slightly in 2015, which implies that the pace of export growth will grow more slowly than the pace of import growth. One problem is that the EU's banking and sovereign wealth problems are still far from being resolved. While the situation in the EU is unlikely to cause a major financial panic in 2015, its growth prospects do not look good. Spending on commercial real estate will be neutral--or slightly positive--in terms its contribution to GDP growth, with spending on buildings related to manufacturing and communications posting the largest year- over-year percentage gains. Due to weaker than expected growth of end markets, spending on inventories is expected to subtract slightly from GDP growth. Because most state and local governments have adjusted their spending and staffing to reflect available resources, their spending will contribute to GDP growth, but the fiscal drag from the federal government will have the opposite effect. The expectation that economic growth will be sustained depends on several positive developments. First, sales of both new and existing homes as well as spending on new home construction will increase. Second, credit markets will continue to thaw. Third, new jobs--and slightly higher wages--will be created in the private

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