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>>Announcer: Welcome to the Wells Fargo Monthly Economic Outlook, a monthly economic commentary.
This month, Wells Fargo's Senior Economist, Eugenio Alemán, joins your host, Sarah House.
[Sarah] Welcome to the Wells Fargo Monthly Economic Outlook.
I'm your host, Sarah House, and this month, I'm joined by Wells Fargo Senior Economist,
Eugenio Alemán.
[Eugenio] Hi, Sarah.
>> Eugenio, the first quarter has now come to a close.
And after a rough start to the year, how does it look like growth fared for the overall
first quarter?
>> Very weak. We are expecting growth to have been very,
very weak, 0.1%. Affected fundamentally by structures, by investment
because and by equipment because of the collapse in petroleum prices and the effects of energy
sector on the economy. However, the consumer is a little bit stronger
but not very strong. Exports are also going to be a drag on economic
growth. Overall, a very, very weak quarter, but we
are looking at some indices or indications that the economy is coming back.
>> Well, you indicate that consumer spending has been one of the better parts of economic
growth in recent months. Can the consumer continue to propel growth
forward as we look ahead in the coming quarters?
>> I think so. I mean, the consumer has been the driving
force of the U.S. economy for seven years already and we are expecting it to continue to be.
The problem is that consumer demand was a
little bit on the weak side in the first quarter. We estimated 1.9% growth annualwise, but for
the rest of the year, we are expecting 2.7%. So we expect the consumer to continue to be
the driving force for the U.S. economy. And that is good news and that is being propelled
by very, very important employment sector.
>> Well, let's talk about the labor market. So we have seen job growth continue to remain
very strong and yet we have seen the unemployment rate begin to tick up.
So what's behind that inherent disconnect, and what does that say about how much slack
remains in the labor market?
>> Yes. The unemployment rate ticked up to 5% in March
from 2. I mean, from 4.9% in February. It doesn't mean that we are going into trouble.
I mean, employment growth was very, very strong, 215,000.
So what is happening and what is happening is that there are people that were not looking
for a job that are coming into the labor force again.
So the labor force participation rate has been going up for the last the last two or
three months and that is very good news because that means that people have been out of the
labor force, that were not did not have any incentive to get into the labor force to get
a job are, once again, coming back which means that they see that things are getting better.
So even though the unemployment rate went up, it is still good news for the economy
and there's plenty of slack at least for now. The Federal Reserve is still concerned about
such a low unemployment rate but for now, they're okay.
>> Well, looking at the other side of the fed's mandate inflation, we have seen that
begin to creep higher. Is this just a rebound in commodity prices,
or is this due to a broader pickup?
>> No, it is broader than commodity prices. Yes, commodity prices are increasing again
because the period where they were very, very low is ending and now we are seeing the comparison
to pick up again, but if you subtract energy and food prices from the index, you can also
see that prices or what we call the core prices are going up also.
So that is good news because that means that firms have pricing power and that means also
that the economy's recovering or continues to recover.
>> So between the improvement in the labor market and that pickup in core inflation,
what does that mean for the potential and the timing of another fed rate hike this year?
>> Yeah. We're still saying that the Federal Reserve
is going to increase interest rates in June so that is our official call, but I think
that we still need some more information. Let's see what happens in the second quarter,
how numbers come during the first two months of the quarter and the Federal Reserve is
going to have a better picture of the actual situation.
My guess is that if they don't increase interest rates in June, then the political system comes
in and it is going to be very difficult to increase interest rates after the June meeting.
So I think that, you know, the unemployment rate went up.
Inflation is going up so there's probably some some time, they have some more time to
make a decision still.
>> Well, how much are global considerations whether it's either just the slow pace of
global growth or the policy stances of other major central banks, how much is that playing
into the fed's decision making right now in your view?
>> Yeah. That is not a part of the fed mandate.
I mean, checking what is happening in the rest of the world, but they know the rest
of the world affects what happens in the U.S. And at the same time, it's very, very difficult
for one central bank, which is the largest central bank, to increase rates in an environment
where everybody's low earning interest rates. Even have negative interest rates.
And the more the Federal Reserve increases interest rates in this environment, the more
the U.S. dollar is going to appreciate and that is going to hurt the manufacturing sector
more. I mean, they are saying, look, we our mandate
doesn't say that we should take care the rest of the world into consideration, but we are
actually taking care, taking that into consideration because it's part of the overall interest
rate environment. So it is it is important.
It is not the most important, but they do take it into consideration.
>> Well, thank you, Eugenio, and from all of us at Wells Fargo, thanks for joining us.
Please tune again next month as we discuss the latest outlook on the economy.
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>>Announcer: Thanks for watching. Additional commentary is available on wellsfargo.com/economics.
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