GDP Estimates Sour, Investment Banks Urge Caution

A number of leading economists and investment banks in the United States are warning that American GDP growth is likely to disappoint, even after several downward revisions over the last six months.

Two large investment banks urged caution to clients in the last two weeks, citing the likelihood that the Federal Reserve will cut their forecast for GDP growth at their next monthly meeting. The Fed currently has a 2.5% midpoint estimate for annual growth, but economists are warning that actual growth is likely to fall much further.

GDPNow a Canary

A number of leading economists and investment banks in the United States are warning that American GDP growth is likely to disappoint, even after several downward revisions over the last six months.

Two large investment banks urged caution to clients in the last two weeks, citing the likelihood that the Federal Reserve will cut their forecast for GDP growth at their next monthly meeting. The Fed currently has a 2.5% midpoint estimate for annual growth, but economists are warning that actual growth is likely to fall much further.

GDPNow a Canary

One analyst said that the Atlanta Fed’s “GDPNow” metric is a “canary in a coal mine,” noting that the metric sees just 0.7% growth in the second quarter, after seeing just 0.1% growth in the first quarter.

This metric, while controversial, proved the most accurate for the first quarter, when traditional economic models were predicting growth of around 1%. Citing the port strike in Los Angeles, cold weather in the northeast and stagnant wages throughout the country, the Atlanta Fed suggested that a number of structural conditions are likely to keep growth sluggish.

A key concern is the failure of consumer confidence and spending to rise. Consumer spending rose 0.4% in March, doubling the growth rate in February, but below expectations of 0.5% growth. That increase is largely attributable to falling oil costs and broader employment gains, but even with those tailwinds many analysts are warning that the improvement in consumer spending is lackluster relative to what most models predicted.

At the same time, the Bureau of Economic Analysis attributed the low GDP growth of the first quarter to a fall in the rate of personal consumption growth. At the same time, the BEA noted private inventory investment and Federal government spending are picking up the slack.

Many economists believe neither of these will be sustainable to drive growth in the long term, as political pressures and a fall in consumer-driven demand will impact government spending and private investment, respectively. As a result, the slump in consumer spending could have a rebound effect that impacts the broader U.S. economy.

Student Loans, Debt Headwinds

An additional focus of economists’ falling expectations for America’s economy is the student debt level, which has far surpassed $1 trillion and now accounts for nearly 10% of total household debt. Student loan debt is also the fastest growing debt category on a relative basis, with $32 billion in fresh student loan debt hitting Americans in the first quarter of 2015.

Several economists note that a combination of demographic trends and structural changes in American higher education are contributing to the lackluster growth. If these issues remain unaddressed by policymakers, the economists warn, American growth could remain depressed. While the large baby boomer generation continues to retire at a faster rate, causing the labor participation rate to fall, Millennials are facing higher student loan debt and a substantially lower labor participation rate relative to other age groups.

Additionally, Millennials’ starting incomes are as much as 7% lower than the incomes of previous generations’ college graduates, on an inflation-adjusted basis. This is resulting in less discretionary income after debt servicing, impacting consumer demand.

With university tuition increasing above the rate of inflation, many economists believe this trend will only worsen in the near-term.