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Forecast for the 2015 economy: Sunny

It could be the year that ordinary Americans finally feel like the economy is working for them.
A rainbow forms over a neighbourhood following a massive snow storm in West Seneca
A rainbow forms over a neighbourhood following a massive snow storm in West Seneca, New York, Nov. 24, 2014.

It could finally be the year that ordinary Americans feel like the economy is working for them.

The forecast for the U.S. economy in 2015 is positively rosy, and it could finally spur bigger wage gains for more workers. 

“It will be a better year—it will certainly feel better,” said Ethan Harris, head of North America Economics at Bank of America Merrill Lynch’s research division. “In 2015, for the first time, we’ll see a modest pickup in wages. As the labor market tightens, workers will be getting a little bit of negotiating power.”

Average wages have grown only 2.1% over the past year—the same sluggish pace as in 2013—but many economists are hopeful the gains will continue to accelerate as the economy adds more jobs. The unemployment rate is now at 5.8%, down from 6.7% in December 2013, and it’s expected to continue declining through 2015.

As recently as this summer, half of all Americans still believed that the U.S. was a recession. In reality, the recession officially ended in the summer of 2009. But climbing out of the hole has taken far longer than expected. While the economy has steadily added jobs—with 57 consecutive months of job growth to date, a record streak—the slow pace of the recovery and stubbornly low wages have kept those gains from being felt more broadly.

“The good news is that the job growth is broad based across industries, regions, and pay scales,” says Mark Zandi, chief economist of Moody’s Analytics, predicting that the economy will add more than 3 million jobs in 2015. “The only sector that hasn’t kicked into gear is housing and construction.”

Economists expect the economy to grow 3.0% in 2015, according to a survey of professional forecasters, up nearly a full percentage point from 2014. In fact, the reason that overall growth wasn’t stronger last year was largely due to a bad first quarter, when an unusually brutal winter dealt a big blow to the economy. GDP growth has been higher than 3.0% for four out of the last five quarters, and that momentum is expected to continue in 2015.

“The underlying fundamentals of the economy are quite solid,” said Gus Faucher, senior economist at PNC Financial Services. “Consumer balance sheets are in good shape, business balance sheets are in the good shape, and the government’s balance sheet is in better shape.”

Justin Wolfers, a professor at the University of Michigan, agrees that the economy is faring well and expects it will continue to do so in the coming months. He warns, however, against getting too sanguine about how the economy will shake out through 2015. “It will continue to be good unless it won’t,” he said, adding: “The biggest risk is the one we haven’t thought of.”

In terms of risks on the horizon, the biggest threat would be a slowdown in the global economy. Analysts are particularly concerned about potential spillover effects from Russia, whose economy is faltering due to plunging oil prices and sanctions imposed by the U.S. and European Union. There could also be a further slowdown in Japan, which has slipped back into a recession, and in China, which is no longer growing at a breakneck pace.

But analysts believe that the U.S. economy is robust enough to weather a more severe global downturn. “It would take a really bad recession overseas to do significant damage to the U.S. Odds are good that the U.S. can rise above what’s happening overseas,” Zandi said.

Another potential speed bump is the Federal Reserve. The central bank will eventually raise interest rates to keep the economy from overheating and inflation in check. But if the Fed acts too quickly, higher rates could deliver a shock instead, particularly to the housing market and business investment. The Fed, however, has been trying to reassure the market that it will be “patient” in making its move. 

Unlike previous years, analysts don’t expect Congress to be a significant threat to growth. The self-imposed austerity from budget cuts and a handful of tax hikes has subsided. And economic forecasters generally believe that Capitol Hill has learned its lesson about fiscal brinksmanship. 

“My working assumption is that Washington does no harm, doesn’t do anything silly like shut the government down or threaten to breach the debt ceiling,” said Zandi. 

Even if such fights surface again, the markets will be less inclined to take them as seriously, Harris added. “People have gotten used to the threats and no longer worry as much. We’ve been through it.”