The Securities Industry and Financial Markets Association’s (SIFMA) Economic Advisory Roundtable today unveiled its outlook for the balance of 2008 and 2009, forecasting subdued U.S. economic growth for full-year 2008, but beginning to pick up in 2009, especially in the second half of the year. In the mid-year survey, the median forecast is for GDP growth of 1.6 percent for full-year 2008 and 1.9 percent in 2009. Housing sector weakness, tight financing conditions, rising commodity prices, aggressive central bank actions to support market liquidity, and the effect of fiscal stimulus provide the backdrop for the economic outlook.
“The general consensus of the Roundtable is that the U.S. economy will continue to encounter stiff headwinds through 2008, but begin to revive in 2009. The combined effect of accommodative monetary policy and the economic stimulus package will set the stage for expansion next year,” said Steve Davidson, managing director of capital market research. “Additionally, the survey respondents anticipate that the FOMC’s statement following its June 25-26 meeting will still emphasize economic growth risk, but with an indication that the risk is diminishing. The statement is also expected to focus on inflation and inflationary expectations.”
Interest Rates
Survey participants were unanimous in the opinion that the Federal Open Market Committee (FOMC) will hold the target Fed funds rate unchanged at 2.00 percent at the upcoming June 25-26 meeting. Furthermore, the panelists do not expect the target rate to change until late this year or, more likely, next year. When the Federal Reserve does decide to move, the strong, though not unanimous, view is that the next move will be an increase of 25 basis points.
Commodity Price Surge
The consensus view of the Roundtable is that the recent spike in commodity prices is driven largely by global demand. Panelists commented that the supply response to higher prices is limited in the short term, or rather, supply is price inelastic over the short term. Panelists noted that the value of the dollar is a factor, but its influence is exaggerated. They commented that a soft dollar may prevent some demand adjustments in non-dollar countries, and it may dampen supply responses, but noted that the assumption of a simple mathematical link between the dollar and commodity prices is inaccurate.
Central Bank Actions
The Economic Advisory Roundtable respondents were nearly unanimous in the opinion that there has been a “somewhat improved tone” in the markets. Reduced systemic risk in response to the Federal Reserve’s aggressive provision of liquidity through the developments of new and expanded facilities over the first half of 2008 was the most frequently cited reason for this improvement. The panelists also identified capital raising activities by leveraged institutions as an important reason for the improved market tone.
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