U.S. Economy’s Spring Thaw

Lower oil prices and a stronger dollar have a warming effect on the economic rebound, PNC experts say, while the trade deficit and weak business investment are holding back growth.

It’s been a slow start for the U.S. economy and the financial markets in 2015. The spring thaw – aided by low oil prices, better housing and auto activity, and consumers eager to spend -- should take off the chill and warm up the economy and markets for faster growth in the coming quarters.

That’s the thinking of PNC Chief Economist Stuart Hoffman and Chief Investment Strategist Bill Stone, who recently shared their insights in a PNC Perspectives on the Market web seminar.

Strong dollar, low oil prices should aid rebound

Despite a sluggish first quarter, the U.S. economy should rebound in the next few quarters, as the country continues its “Made in the U.S.A.” economic expansion. “For the economy to pick up speed, it’s up to consumer-driven, homegrown indicators – job growth, income, wages, spending, housing and auto sales,” Hoffman said.

Small business owners, recently surveyed by PNC showed more optimism about the economy and their own business prospects. They’re supportive of the economic recovery we’re forecasting.

One of the biggest drivers of his positive economic outlook is the collapse in crude oil prices, with a gallon of gas down $1.25 from 12 months ago. He said: “Every penny saved at the pump from lower gas prices benefits consumers by $1 billion, or more than $100 billion in 2015. In the aggregate, consumers are in great financial shape today – debt is down, and financial obligations are at some of the lowest levels we’ve seen in a while.”

Trade deficit, weak investment create speed bumps 

What’s preventing the economy from reaching top speed? Hoffman attributes some of the lag to businesses’ unwillingness to spend capital, despite “lots of cash on their balance sheets.” In addition, the strong dollar – while positive for holding U.S. inflation in check -- has fueled the country’s growing trade deficit. “A strong U.S. dollar, coupled with sluggish global growth, is a recipe for weakness in exports,” Hoffman said.

Expect more market volatility

At the same time, investors can expect more swings in the financial markets, Stone said. "Historically, we’ve seen volatility in the fixed income and equity markets in advance of Fed actions, so investors should expect this. It’s a good time for investors to review their portfolio’s asset allocation to make sure it’s appropriate for reaching goals and tolerating market swings.

Experts expect negative earnings for the S&P 500 index for the first time in three years, Stone said, largely as a result of a weakened energy sector. “When we strip out the energy sector, we see a better picture of corporate America,” he said. “It’s important to remember that lower oil prices are a net positive for the U.S. economy and financial markets, because we are net consumers of energy and oil, not producers.”

Stuart Hoffman, Chief Economist, PNC

Bill Stone, Chief Investment Officer, PNC Wealth Management

Hoffman expects short-term interest rate increases will be gradual, rising slowly to 3 percent by 2019. In tandem, rates on 10-year Treasury bonds and fixed mortgage will inch up.