Fannie Mae chief economist says this is the biggest problem for the economy
It's not uncommon for the U.S. economy to slow down five years into an economic recovery, but the sharp downward revision of first quarter GDP announced today was a shocker. The economy shrank by 2.9% -- nearly three times the 1% decline reported previously and nearly twice the decline that economists had expected.
"It was well below our expectations," says Doug Duncan, chief economist of Fannie Mae, about the latest GDP report. "We had expected [first quarter GDP] would be down 1.5-2%."
Related: Here's how the economy could prosper, according to Steve Forbes
Fannie Mae had just released its latest 2014 economic forecast before the GDP report, revising its annual economic growth forecast downward to 2.1% from 2.6% previously. Duncan says even that forecast "might be a stretch now." He expects second quarter growth will be close to 3%.
The first quarter slump in GDP reflected declines in exports, inventory buildups, investment in nonresidential structures and health care spending, which reduced consumer spending. "All aligned to give this very bad number," says Duncan.
Related: The Fed's moves could be a warning sign
But since all those numbers are in the past, what can we expect in the future? Will the economy slip back into recession?
Duncan doesn't think so. "The issue is in the employment space,” explains Duncan in the video above. Although total payrolls have now recovered to their pre-recession level, the number of full-time jobs won't reach that level until July 2015, says Duncan. And if that number is adjusted for the growth of the working age population, it won't be until January 2018 that full-time payrolls return to their pre-recession level, says Duncan. The government releases its June jobs report next Thursday, July 3.
Meanwhile there are signs that the economy is improving in the current quarter. Payrolls have been growing by more than 200,000 per month and auto sales, and new and existing home sales are increasing. On Tuesday the Conference Board reported that consumer confidence rose to 6-1/2 year high in June, but Fannie Mae's own monthly housing survey showed that 57% of respondents say the economy is heading in the wrong direction. Duncan explains that the different readings in confidence reflect the divergence in income levels.
Follow The Daily Ticker on Facebook and Twitter (@dailyticker).
More from The Daily Ticker
"It looks like a peak": Robert Shiller's CAPE is waving the caution flag
