• Economy still on track despite fall in manufacturing ISM and another weak jobs report. Following GDP growth of 1.9% in 2013 we are forecasting GDP will grow by 2.8% in 2014 and 2.9% in 2015.
• Inflation remains well below Fed’s 2% objective, but does not appear unusually low given the still large amount of spare capacity in the economy. Other factors are USD appreciation and subdued inflation in other countries which have contributed to declines in import prices and this has been reflected in domestic goods prices.
• Inflation should move back towards target over time, but it will likely be a slow process.
• Fed tapering of its QE program is likely to continue through 2014, with the program ending around the December quarter. No change in the fed funds rate is expected until well into 2015.

Towards the end of January, when the advance GDP estimate for the December quarter was released, the mood seemed to be one of general optimism. GDP grew at an annualised rate of 3.2% and growth over the second half of 2013 was the fastest half-yearly growth rate in almost two years. Even after excluding inventory accumulation, the picture was of an economy that strengthened over 2013.

However, since then some doubts have crept in. These have been driven by declines in U.S. equity prices and pressures on some emerging economies including confirmation that the Chinese economic growth was slowing down. There was also a big fall in the ISM manufacturing index, and the January jobs report was well below expectations.

For further analysis download the full report.

• US Economic Update – February 2014 (PDF, 241KB)