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Wall Street just got more pessimistic about the US economy

Will the fed follow suit?

Federal Reserve officials will probably cut their forecasts for economic growth when they gather again next month, though not enough to deter their intent to raise interest rates later this year.

The median respondent to a survey of 79 economists conducted by Bloomberg from May 8 to May 13 said US gross domestic product would grow 2.3% % in the final quarter of 2015 from a year earlier, down from the 2.7% % median estimate in April.

That compares with a 2.5% % midpoint of the central tendency of estimates submitted by Fed officials at their March meeting, the last time they issued updated forecasts. The central tendency denotes the range of estimates excluding the three highest and three lowest of the 17 policy makers’ projections.

 fed reserve

Economic data released since the Federal Open Market Committee’s March forecasts have revealed unexpected weakness in the first quarter. Economists have attributed this to mostly transitory factors such as the rise of the dollar, a drop in oil prices, harsh winter weather and a slowdown at West Coast ports due to labor disputes.

Forecasting firm Macroeconomic Advisers now estimates the US economy contracted at a 0.9% % seasonally adjusted annualized rate in the first three months of the year. 

The central question now: Will the slowdown prove temporary or will it persist? The arrival of the first round of April data in recent days has prompted analysts to begin marking down estimates for the current quarter as well.

And economists don’t necessarily expect growth over the next few quarters to make up for the surprise drop in the first quarter, unlike in 2014, when a surprise contraction in the first quarter was made up over the rest of the year.

The median respondent to the Bloomberg survey said the US will grow at a 2.7% % seasonally adjusted annualized rate in the second quarter, down from 3.1% % a month ago. The median estimate for growth in the third quarter was unchanged at 3% % annualized, and the median prediction for fourth-quarter growth was bumped up a mere tenth of a percentage point to 3%.%.

“That’s kind of what people have in mind: that perhaps we will get above-trend growth from now on, but unfortunately probably not fully make up for the loss that we saw relative to trend in the first quarter,” said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC in Stamford, Connecticut.

Still, the Fed may continue on with their plans to raise interest rates soon anyway, according to Dana Saporta, a US economist at Credit Suisse Securities USA LLC in New York.

“Jobs are growing fast enough to put downward pressure on the unemployment rate,” Saporta said. “So, I do think they might revise down GDP, but that will not necessarily mean that all bets are off for the beginning of policy normalization later this year.”

©2015 Bloomberg News

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