SIFMA’s Economic Advisory Roundtable unveiled today its outlook for end-year 2014 and 2015, forecasting that the economy will grow at a 2.3 percent rate in full-year 2014 and will rise to 3.0 percent in 2015. Despite concerns of global growth and monetary policy uncertainty, the outlook for full year 2014 is slightly higher than the Roundtable’s previous prediction of 2.2 percent.
“2015 could post the strongest growth in nearly a decade. Continued employment gains, firming wages and somewhat less restrictive fiscal policy, particularly at the state and local levels, are expected to provide offsets to the headwinds created by problems abroad and a strong U.S. dollar,” said Diane Swonk, chief economist and managing director at Mesirow Financial Holdings, Inc. and chairman of SIFMA’s Economic Advisory Roundtable.
“Twice per year, SIFMA’s roundtable of securities industry economists conducts an outlook and rates forecast survey. The 2014 end-year survey indicates the potential for an improving economy with greater capital investment and employment growth – all of which would benefit individual Americans and small business formation and development,” said Kenneth E. Bentsen, Jr. president and CEO of SIFMA.
Monetary Policy:
The Roundtable expects the Federal Open Markets Committee (FOMC) to maintain its current 0.0 to 0.25 percent target federal funds rate range through mid-year 2015. It expects FOMC to begin shrinking the Federal Reserve’s balance sheet by curtailing reinvestment of proceeds from its asset holdings on the first quarter of 2016. As predicted in the previous survey, the FOMC would up its asset purchase program before the end of this year.
The Economy:
The median forecast called for 2014 gross domestic product (GDP) growth to be 2.3 percent on a year-over-year and 2.2 percent on a fourth quarter-to-fourth quarter basis. For full-year 2015, GDP growth is expected climb slightly to 3.0 percent, on a year-over-year basis and by 2.8 percent on a fourth quarter-to-fourth quarter basis, slightly weaker than predicted in the mid-year survey.
Unemployment is expected to continue to improve. Survey respondents forecast that full-year average unemployment rate will decline to 6.2 percent in 2014 and fall further to 5.4 percent in 2015. Expectations for consumer spending trends fell below those in mid-year 2014, with personal consumption estimated to be 2.3 percent in 2014 and 2.7 percent in 2015.
Business capital investment growth is estimated to strengthen in full-year 2014, reaching 6.0 percent from 3.6 percent forcasted at mid-year. In 2015, the median forecast is 5.8 percent growth.
The median forecast for “headline” inflation, measured by the personal consumption expenditures (PCE) chain price index, weakened from the mid-year forecast with 1.4 percent growth expected in full year 2014 and 1.3 percent in 2015. The median forecast for the core PCE chain price index was at 1.4 percent for full-year 2014 and 1.6 percent forecast for full-year 2015.
The outlook for inflation remains moderate thorough the beginning of 2015. Respondents expressed no concern for inflation in the first half of 2015; however, they did express worry with below target inflation for the same time period. Economic slack/employment was the dominant factor in the economic outlook, with oil prices rising to second place. One respondent stated, “Inflation expectations appear to be falling; this needs to be watched closely by the Fed.”
Interest Rates:
The FOMC is expected to maintain its 0.0 to 0.25 percent target federal funds rate throughout 2014 and early 2015. The median forecasts for 10-year U.S. Treasury is expected to rise quarterly, reaching 2.85 percent in December 2015. The most commonly cited “greatest impact” was from FOMC interest rate policy, followed by inflation expectations. Half of respondents expected the Treasury yield curve to steepen in the first half of 2015, 44 percent expect it to flatten, and one expected no change.
Monetary Policy:
None of the respondents expect the first hike in the federal funds target rate before the second quarter of 2015. Regarding factors mentioned by the FOMC as important to their decision-making considerations, respondents ranked indicators of inflation pressure and inflation expectations as the most important factor, closely followed by measures of labor market conditions and more distantly by readings of financial developments. Other factors cited by respondents included growth expectations, global economic conditions and credibility.
Risks to Growth: Oil prices, Housing, Corporate Capital Expenditures on the Upside; Global Slowdown and Geopolitical Risk on the Downside
Upside and downside risks varied, although there was a clear leader on each side. Oil prices was the most frequently cited upside risk (40 percent of respondents), followed by housing. On the downside, one respondent noted, global economic slowdown was the most oft-cited downside risk to the economic outlook, and more specifically, risk from the Eurozone.
Panelists placed a 60 percent chance on WTI oil prices remaining below $85 a barrel in 2015, with a 35 percent chance of prices moving between $85 and $115 per barrel, and a 5 percent chance for $115 per barrel. Two-thirds considered the drop in oil prices to be a transitory indicator, with several citing it as a product of oversupply rather than weak demand.
As in prior surveys, resolution of corporate tax reforms, followed by immigration reform, were noted as the two pending issues with the greatest potential impact on the U.S. economy, followed distantly behind by trade talks (TPP, TTIP, etc).
Impact of Mid-Term Elections:
The newly-elected Republican majority in the Senate is expected to have no impact on the Federal Reserve, with a few respondents saying any impact would be “heightened scrutiny.” Respondents expect minimal to no impact on the fiscal outlook, with a possible slight increases in spending.
Impact on Regulatory Policy:
A modest majority of respondents (55 percent) expect that the new Republican majority will result in somewhat less intensity of interest in financial regulation, with 45 percent expecting it to have no impact. When asked about the impact of concern or uncertainty over the direction of financial regulatory policy generally, on 2015 economic growth, two-thirds of respondents estimated no impact, while the remaining third estimated a negative impact of up to 50 basis points.
The full report is available here.