Secular Stagnation in US?

We expect the US economy to grow above trend through 2017, as the healing of the private sector continues and fiscal drag abates. Given considerable labor market salck and low inflation, we forecast the first funds rate hike for September 2015. While the pace of hikes is likely to be gradual at first, we expect the funds rate to reach 3.75-4% in 2018.

This outlook is more optimistic than the "secular stagnation" view put forward by Havard economist Lawrence Summers one year ago. He suggested that the economy may be in a situation where the "neutral" real interest rate is deeply negative and may remain low for a long time to come, preventing a return to full employment.

We agree that the nuetral real interest rate has likely been negative in recent years. But we see a number of reasons to view this as more cyclical than secular.

First, the pickup in growth over the last year suggests that the earlier weakness was primarily due to long-lasting but ultimately temporary headwinds, such as household deleveraging and fiscal drag. Of course, the growth acceleration has come with zero rates and it is still early, so the pickup is only weak evidence against secular stagnation.

Second, our estimates of the nuetral rate are negative at present but projected to normalize as the economy returns to full employment.

Third, the secular stagnation view contrasts with the historical record. In a sample of 19 countries stretching back mostly to the 1800s, we find that the average 2% US real rate of the postwar period looks reasonably representative of the longer-term historical record.

It is still early days and we only view these considerations as preliminary evidence against secular stagnation. Moreover, many of the policy implications may still be valid if the weakness is more cyclical than secular, including the need for continued accommodative policy. Finally, other parts of the world - for example, Europe - may be better candidates for secualr stagnation. But for the United States, we are more optimistic.