There are two different lenses through which to view the recent slowdown in the U.S. economy: one emphasizes real growth, while the other highlights nominal growth.
Economists—and the Fed—typically focus on real growth because it reflects the true level of underlying demand in the economy. From the Fed’s perspective, we should begin to see a marked increase in wages and inflation this year, factors supporting a stronger pickup in real economic activity.
The nominal view, which is how the markets perceive the economy, is currently more pessimistic. Nominal GDP growth could fall below 2% this summer, and subtracting inflation from that level would necessarily result in weaker real growth.
These two contrasting views cannot be reconciled; either one or the other is correct, but not both. Over the next few months, we will know which one, based on the direction of unemployment and inflation, as well as other key indicators.
While we do not foresee an imminent recession, there is enough evidence to lower our forecast for 2016 average GDP growth from 2.6% to 2.0%.