SIFMA's Economic Advisory Roundtable unveiled today its outlook for full year 2014 and 2015, forecasting that the economy will grow at a 2.2 percent rate in full-year 2014 and will grow 3.1 percent in 2015. Geopolitical concerns and monetary policy uncertainty, on top of the negative impact of severe weather in the first quarter, contributed to a lowered outlook for 2014, compared to the Roundtable's previous prediction of 2.7 percent.
"The forecast suggests that the falling budget deficit and emerging geopolitical risks could delay a rise in interest rates," said Diane Swonk, chief economist and managing director at Mesirow Financial Holdings, Inc. and chairman of SIFMA's Economic Advisory Roundtable.
Monetary Policy:
The FOMC continues to scale back the pace of its asset purchases and began shifting its focus to a more nuanced view of labor market conditions. Survey respondents were unanimous in their opinion that the FOMC would end the asset purchase program in the fourth quarter of 2014, with the median expectation that the Fed's balance sheet would reach $4.5 trillion, at the program's termination. One respondent noted that the Fed "needed to be aware of possible financial market reactions… [t]he rest of the world is expected to be sensitive to what the Fed does and how rapidly it moves."
The Economy:
The median forecast called for 2014 gross domestic product (GDP) growth to be 2.2 percent on a year-over-year and a fourth quarter-to-fourth quarter basis. Survey respondents agreed that the unusually harsh winter played a significant role in the year's weak first quarter, but GDP growth is expected to climb to 3.7 percent in the second quarter before falling to 3.1 percent in the third quarter and 3.0 percent in the fourth quarter. For full year 2015, GDP growth was expected to climb to 3.1 percent.
Unemployment was expected to continue to improve in 2014. Survey respondents expected the full-year average unemployment rate to decline to 6.3 percent in 2014 and further decline to 5.8 percent in 2015. Non-farm payroll gains were expected to reach 2.4 million jobs in full-year 2014 and 2015. Consumer spending trends improved significantly from end-year 2013, with personal consumption estimated to rise 2.8 percent in 2014 and remain the same in 2015.
Business capital investment for full-year 2014 weakened to 3.6 percent, down from the 5.0 percent forecasted at year-end. In 2015, it is expected to strengthen to 5.7 percent growth.
The median forecast for "headline" inflation, measured by the personal consumption expenditures (PCE) chain price index, is expected to be 1.5 percent growth for full-year 2014, and 1.8 percent for full-year 2015. The median forecast for the core PCE chain price index was at 1.4 percent for full-year 2014, with a 1.8 percent rise forecast for full-year 2015.
The 2014 outlook for inflation remains moderate, with economic slack/employment being the dominant factor, followed by global economic conditions, with the Federal Reserve's balance sheet and fiscal policy/deficit trends ranked third and fourth in importance.
Interest Rates:
The Federal Open Market Committee (FOMC) is expected to maintain its 0.0 to 0.25 percent target federal funds rate throughout 2014 and the first half of 2015. The median forecasts for 10-year U.S. Treasury is expected to rise quarterly, reaching 3.26 percent in June 2015 with inflation or inflationary expectations, FOMC interest rate policy, and credit mark risk aversion/flight to quality cited as being the "greatest impacts." A little more than 80 percent of respondents expected the Treasury yield curve to steepen through the second half of 2014.
Risks to Economic Growth: Housing, Corporate Capital Expenditures and Consumer Spending on the Upside; Global Slowdown and Geopolitical Risk on the Downside:
The normalization of private credit markets took center stage for promoting GDP growth in the second half of the 2014 outlook, with half of the respondents considering it the most important factor, followed by FOMC interest rate actions and China.
Upside and downside risks to the growth forecasts varied among respondents, with housing being cited most frequently as an upside and downside risk. The most oft-cited upside risks included stronger than expected corporate capital expenditures, recovery of the housing market, and consumer spending. Global slowdown, geopolitical risk, and weaker than expected housing recoveries were the main downside risks.
Washington DC Gridlock:
Corporate tax reforms and immigration reform were noted as the two pending economically significant issues most impacted by the "gridlock." Trade talks and a long-term budget were also mentioned, as well as GSE reform, banking regulation, healthcare reform, and appropriations.
Impact of Regulatory Policy:
Nearly 57 percent of respondents estimated up to 50 basis points reduction of GDP growth in 2014.
Oil Prices:
Panelists placed an 80 percent chance on WTI oil prices remaining between $85 per barrel and $115 per barrel in 2014, with a 10 percent chance of prices moving either above or below this range. The most likely scenario - prices remaining between $85 and $115 - was expected to have no effect on GDP growth.
The full report is available at the following link:http://www.sifma.org/economicoutlook20141h/
