Economic Outlook 2015: Signs point to 3% US Growth

Published on February 13, 2015

The US economy is on the road to 3 percent growth this year, but it will have to navigate a few potholes, according to a panel of Chicago Booth economists at Economic Outlook 2015 in New York.

“The outlook is a little bit cloudy,” said panelist Randall S. Kroszner, Norman R. Bobins Professor of Economics. “The fundamentals are there to get into the 3 percent range for the next year, but some challenges are ahead.”

Kroszner shared the stage with Erik Hurst, V. Duane Rath Professor of Economics and the John E. Jeuck Faculty Fellow, and Carl R. Tannenbaum, AB ’81, MBA ’84, senior vice president and chief economist at Northern Trust Corp. They presented their views on the near-term future of the global economy at the Plaza Hotel on February 3.

Consumers are showing an appetite for spending, as energy prices continue to slide, Kroszner said. By and large, companies are doing well but aren’t investing stateside, preferring to keep $2 trillion in cash overseas to avoid US taxes. Exports are strong, but a rising dollar and the slowing of economic growth overseas present headwinds. Government spending slowed late last year, but President Obama’s proposed $4 trillion budget signals willingness to inject money into the economy.

The potholes, Kroszner cautioned, make 3 percent growth “fragile.” Consumers are saving a little more, rather than spending. Tax reform could unleash corporate investment, but Obama’s proposed budget includes $1.4 trillion in new taxes over the next five to 10 years.

One of those challenges is the potential for a debt-deflationary spiral to take hold in Europe, with countries and companies unable to generate enough revenue to meet obligations. That could squash global growth.

In the US, Hurst sees labor market weakness and income equality as potential traps.

“Employment is growing, but jobs are not being filled with people with less than a college degree,” Hurst said. “Prior to the Great Recession, 15 percent to 17 percent of men without a four-year degree were away from the labor force. That skyrocketed to 25 percent after the recession, and they’re not seeing a huge rebound.”

Hurst said the picture could change as less-skilled workers acquire computer technology and health care training. But the effects won’t be seen for a while.

“We’re starting to see younger cohorts acquiring these skills,” he said, but there’s a chunk of people who are sitting idle. You can trace the people who used to work in manufacturing and today, they’re the ones showing up in the non-employment statistics.”

Tannenbaum expressed guarded optimism that the economy could bloom beyond the low-3 percent threshold.

Promising signs include lower energy prices and the global movement toward monetary accommodation. Job creation may be meager and wage growth isn’t ideal, but this is better than no job creation at all, he noted. Finally, there is a wealth effect from strong markets. “I think that if there’s a surprise to come, it could be on the upside,” he said.

Tannenbaum said populist, anti-trade and anti-immigration uprisings such as the ones in Greece are signs of global income inequality that should be fixed to create stability.

“To avoid further economic regression that could cause cultures to question some of the clear benefits that have accrued to nations and investors from globalization, issues of economic opportunity and mobility need to be addressed,” he said.

Unlike Europe, the US is getting younger thanks to a flow of immigrants, whose youth, ideas, and innovation could propel the economy for decades to come, Tannenbaum said. The Republican Congress and Democratic president should act on immigration to seize those advantages, he added.

“I am hopeful that if we get movement in Washington, it will be on immigration,” he concluded.—Eric Gwinn