The D.A.B.E. Hears from Macroeconomic Advisors

By: Paul Traub
On Thursday, October 15, 2015, the Detroit Association of Business Economists met at the Detroit Branch of the Federal Reserve Bank of Chicago and heard an in-depth presentation on the U.S. economy from Chris Varvares, Senior Managing Director and Co-Founder of Macroeconomic Advisors (MA). Varvares is an accomplished macroeconomic forecaster with over 30 years of experience and service as an economist.

According to Macroeconomic Advisors, the U.S. economy will continue to grow at or near its potential through 2018. MA’s estimate for growth in 2015 is 2.2% on a year-over-basis, with growth of 2.5%, 2.5%, and 2.1%, respectively, in the following three years. Varvares pointed to the following assumptions that help form MA’s view:

• China’s devaluation and global financial market turmoil raises new downside risks but does little to change the forecast
o Growth effects of higher dollar and lower equities about offset lower oil prices
o The dollar and oil reinforce a forecast of continued low inflation
o Uncertainty regarding global growth and risky asset prices create added downside risk
• Domestic final demand growth is solid and even better than originally reported
o Past fiscal headwinds could turn into a slight tail breeze as state and local government revenues increase
o Growth of private domestic sales should remain above 3.0% through 2016
o Declining net exports and inventory building are drags to growth, especially in 2015
• Unemployment rate undershoots MA’s “full employment” estimates
o MA estimates the current non-accelerating inflation rate of unemployment (NAIRU) to be 5.0%
o The unemployment rate should reach 5.0% soon and continue to fall to 4.7% by the end of 2016
• PCE inflation will move slowly to 2.0% by the end of 2018
o Core PCE 4Q/4Q should be 1.4% in 2015, increasing to 1.7% in 2016, 1.9% in 2017, and 2.0% in 2018
• Improving labor markets and continued low inflation pose new risks key to the Fed
o MA expects the first federal funds rate hike to come in December 2015 but it’s a close call
o Long rates will rise on expected policy rate increases and rising term premiums
• Equity markets will continued to be challenged by global market turmoil and rising rates

For a look at Varvares entire presentation please click here.