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April 2016 QUEST Monthly Economic Update Real GDP growth for Q4 2015 revised upwards to 1.4% Steady job growth continues; an increase in the federal funds rate is not expected until at least June Ernst & Young LLP’s Quantitative Economics and Statistics (QUEST) group has developed the following monthly publication summarizing the latest key economic and employment trends in a short, easy-to-read format. Developments such as growth trends in US gross domestic product (GDP), US employment and Federal Reserve activity are highlighted, as are economic trends outside the United States that may affect US businesses. US economic trends Real GDP in Q4 2015 grew at an annualized rate of 1.4%, an upward revision of the Bureau of Economic Analysis’s estimate from the prior month. Annualized real GDP growth of 2.1% is expected for Q1 2016, according to The Wall Street Journal (WSJ) Economic Forecasting Survey; this figure slightly exceeds last month’s forecast of 2.0% for Q1 2016. The WSJ survey also indicates that real GDP is expected to increase by 2.3% overall in 2016, slightly below trend. Figure 1. US quarterly real GDP growth at annualized rates 3.9% Actual 2.1% 2.1% 2.0% Forecast 2.4% 2.4% 2.5% Q2 Q3 Q4 1.4% 0.6% Q4 2014 Q1 Q2 Q3 2015 Q4 Q1 2016 Source: Bureau of Economic Analysis and The Wall Street Journal Economic Forecasting Survey. The US economy added 215,000 jobs in March, although the unemployment rate rose slightly from 4.9% to 5.0%, due primarily to growth in the size of the labor force. The Bureau of Labor Statistics’ U-6 underemployment rate, another closely watched measure of slackness in labor markets, also increased slightly, from 9.7% to 9.8%. The U-6 underemployment rate includes the total unemployed, workers who are interested in employment but did not actively search for a job in the past month and workers settling for part-time employment, (Note: A forecast of the U-6 rate is not available.) Employment gains for the months of January and February were revised to +168,000 and +245,000 jobs, respectively. Combined, job gains were 1,000 jobs less for these two months than previously reported. Figure 2. US unemployment rate 12.0% 11.2% 10.5% Unemployment actual Unemployment forecast U-6 actual 9.9% Mar. 2016: 5.0% 6.7% Dec. 2013 6.1% Jun. 2014 5.6% Dec. 2014 Figure 4. US CPI year-over-year growth rate Actual Forecast Feb. 2016: 1.1% 1.6% 2.0% 1.8% 0.7% Dec. 2013 Jun. 2014 Dec. 2014 2.3% 2.3% Jun. 2017 Dec. 2017 1.1% 0.2% Jun. 2015 0.7% Dec. 2015 Jun. 2016 Dec. 2016 Source: Bureau of Labor Statistics and The Wall Street Journal Economic Forecasting Survey. Mar. 2016: 9.8% 13.1% 2016. The inflation rate is expected to increase toward the FRB’s target of 2% by the end of 2016. 5.3% 5.0% 4.8% 4.6% 4.6% 4.6% Jun. 2015 Dec. 2015 Jun. 2016 Dec. 2016 Jun. 2017 Dec. 2017 Source: Bureau of Labor Statistics and The Wall Street Journal Economic Forecasting Survey. The federal funds rate is currently set to a target range of 0.25% to 0.50%. The Federal Reserve Board (FRB) will meet on April 26-27. How or whether changes are made to the federal funds rate will depend on the FRB’s assessment of economic conditions relative to its goals of full employment and a 2% inflation rate target. FRB members now expect only two increases in the federal funds rate in 2016, down from their December projection of four increases in 2016. Figure 3. US federal funds rate Actual Forecast Mar. 2016: 0.25%–0.50% Economic trends outside the United States • Argentina reached a preliminary agreement with four US hedge funds to pay $4.65 billion to settle the funds’ claims on defaulted Argentine government bonds. The deal could allow Argentina to borrow money from foreign credit markets for the first time since its 2001 default. • Standard & Poor’s changed its outlook for China’s credit rating to negative amid China’s rebalancing efforts and a slowdown in the rate of economic growth to below 6.5%. The International Monetary Fund (IMF) expects that Chinese real GDP will grow 6.3% in 2016 and 6.0% in 2017. • The latest EY Eurozone forecast calls for Eurozone real GDP to grow by 1.8% in both 2016 and 2017. By comparison, the previous EY forecast called for 1.8% Eurozone real GDP growth for 2016 and 1.7% for 2017. Source: EY, Bloomberg and the IMF. For more information, contact [email protected] or [email protected]. EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. 0.1% 0.1% 0.1% 0.1% Dec. 2013 Jun. 2014 Dec. 2014 Jun. 2015 0.4% Dec. 2015 0.6% Jun. 2016 0.9% Dec. 2016 1.4% Jun. 2017 1.8% Dec. 2017 Note: The federal funds rate was set between 0.00% and 0.25% from December 2008 through December 2015. Source: Bureau of Economic Analysis and The Wall Street Journal Economic Forecasting Survey. As shown in Figure 4, the inflation rate, as measured by the change in the Consumer Price Index (CPI), was 1.1% in February About the EY Center for Tax Policy The EY Center for Tax Policy is a team of Ernst & Young LLP National Tax professionals who identify marketplace trends, analyze proposed tax legislation and report on implications for various types of taxpayers. For more information, contact Mike Dell at [email protected] or +1 202 327 8788, or Sean Ford at [email protected] or +1 202 327 7113. © 2016 Ernst & Young LLP. All Rights Reserved. SCORE no. 00489-161US BSC No. 1604-1907020 This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com