Market and economic update: 2014 goes out on a high note in the U.S.
The U.S. economy finished 2014 on a strong note, with third quarter gross domestic product (GDP) growth revised up by more than 1%, to 5%, its fastest pace in more than a decade. The economy is unlikely to match this pace in 2015 but growth is likely to remain solid.
Strong employment growth and slowing inflation are likely to help lift consumer activity. Investment growth provided a lift to the U.S. economy in 2014, but the growth will likely be limited in 2015.
The collapse in oil prices seems likely to limit capital spending for domestic oil production, which has reached the highest level in 30 years. A wild card would be if rising consumer confidence and income leads housing demand to recover.
This week, we get the December employment report, which should indicate that strong jobs growth continues, although the pace of decline in the rate of unemployment will likely slow in 2015, with rising confidence improving labor force participation.
In contrast, the tenor of economic activity outside the United States was slowing. Purchasing manager indexes, on average, seem to indicate that activity is not yet slowing to recession levels.
Key for the New Year is the volume and efficacy of monetary stimulus. The Bank of Japan (BOJ) has significantly expanded quantitative easing, the Peoples Bank of China has engaged in some easing policies to support growth, and the European Central Bank (ECB) is likely to provide further monetary support in 2015. The big question for 2015 is whether this monetary stimulus will be effective.
Deleveraging across developed economies appears to be impeding the transmission of money through these economies, limiting the economic lift from monetary stimulus. In China, the rebalancing of the economy from investment-driven growth toward consumption is also limiting the benefits of monetary stimulus while the economy adjusts.
For more information, please go to: https://reserve.usbank.com/insights/market-economic-update-1-5-15
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