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May 2016 QUEST Monthly Economic Update Real GDP for Q1 2016 grew by 0.5% GDP and job growth slow; 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 this 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 Q1 2016 grew at an annualized rate of 0.5%, significantly lower than the 1.4% annualized growth rate for Q4 2015. Annualized real GDP growth of 2.3% is expected for Q2 2016, according to The Wall Street Journal Economic Forecasting Survey (WSJ survey). The WSJ survey also indicates that real GDP is expected to increase by 2.1% overall in 2016, somewhat below trend and also below the forecast for 2.3% annual growth from the prior month’s survey. Figure 1. US quarterly real GDP growth at annualized rates 3.9% 2.1% Actual Forecast 2.3% 2.4% 2.4% Q2 Q3 Q4 2.0% 1.4% 0.6% Q4 2014 Q1 0.5% Q2 Q3 Q4 2015 Sources: Bureau of Economic Analysis and WSJ survey Q1 2016 The US economy added 160,000 jobs in April, below the number of jobs added in each of the past several months. The unemployment rate remained flat at 5.0%. The Bureau of Labor Statistics’ U-6 underemployment rate, another closely watched measure of slackness in labor markets, declined slightly, from 9.8% to 9.7%. The U-6 underemployment rate includes the unemployed workers actively searching for a job, 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.) As shown in Figure 4, the inflation rate, as measured by the change in the consumer price index (CPI), was 0.9% in March 2016. The inflation rate is expected to increase toward the FRB’s target of 2% by the end of 2016. Figure 4. US CPI year-over-year growth rate Actual Forecast Mar. 2016: 0.9% Employment gains for the months of February and March were revised to +233,000 and +208,000 jobs, respectively. Combined, these two months had 19,000 fewer job gains than previously reported. Figure 2. US unemployment rate 2.0% 1.8% 0.7% Dec. 2013 Jun. 2014 Dec. 2014 0.2% Jun. 2015 0.7% Dec. 2015 2.2% 2.2% Jun. 2017 Dec. 2017 1.1% Jun. 2016 Dec. 2016 Sources: Bureau of Labor Statistics and WSJ survey Economic trends outside the United States 13.1% Apr. 2016: 9.7% 12.0% Unemployment actual 11.2% 10.5% 6.1% 5.6% 5.3% • Unemployment forecast 9.9% U-6 actual April 2016: 5.0% 6.7% 1.6% • 5.0% 4.8% 4.7% 4.6% 4.6% 4.6% 4.6% Canada reported an annualized real GDP decline of 0.1% for the month of February. Nonetheless, real annualized Q1 GDP growth of more than 3.0% is expected. This would be the fastest quarterly pace since 2014. Q2 GDP growth is likely to be hampered by reduced oil production due to wildfires in Alberta. The Organisation for Economic Co-operation and Development (OECD) decreased its forecast for real GDP growth in Brazil in 2016 to -4.0% from -1.2%. The decrease reflects political uncertainty surrounding a corruption scandal and the slow pace of structural reforms. Sources: EY, Bloomberg and the International Monetary Fund Dec. Jun. Dec. Jun. Dec. Jun. Dec. Jun. Dec. Jun. Dec. 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 For more information, email [email protected]. EY | Assurance | Tax | Transactions | Advisory Sources: Bureau of Labor Statistics and WSJ survey The federal funds rate is currently set to a target range of 0.25% to 0.50%. Whether the Federal Reserve Board (FRB) changes this rate at its next meeting, June 14–15, will depend on its 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 Forecast Apr. 2016: 0.25%–0.50% 0.1% 0.1% 0.1% 0.1% Dec. 2013 Jun. 2014 Dec. 2014 Jun. 2015 0.4% Dec. 2015 0.6% Jun. 2016 Dec. 2016 1.2% Jun. 2017 1.7% Dec. 2017 Note: The federal funds rate was set between 0.00% and 0.25% from December 2008 through December 2015. Sources: Bureau of Economic Analysis and WSJ survey 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. Actual 0.8% 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. 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. 01239-161US 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