Economists Lower Growth Estimates Ahead of FOMC Meeting

In SIFMA's economic survey, economists take their best guess at when rates will rise

Geopolitical risk and overburdened consumers are weighing on the recovery, economists say. Geopolitical risk and overburdened consumers are weighing on the recovery, economists say.

SIFMA’s Economic Advisory Roundtable says the U.S. economy should grow 2.2% this year, a slower pace than the group’s earlier full-year estimate of 2.7%. Still, U.S. growth could hit 3.1% next year, the Securities Industry and Financial Markets Association adds.

“We believed we could recoup from weather-related losses” of economic growth earlier this year, explained Diane Swonk, chairwoman of the Roundtable, on a call with the press Tuesday.

“This will not happen because of intensifying geopolitical risks,” added Swonk, who is chief economist of Mesirow Financial in Chicago. She pointed to rising oil prices from the deteriorating situation in Iraq.

(SIFMA’s economic survey includes the views of some 20 economists; it was conducted between May 28 and June 10.)

Released one day before a meeting of the Federal Open Market Committee (FOMC), the SIFMA report notes that the Federal Reserve is likely to keep its current zero to 0.25% target federal funds rate through mid-2015. Half of respondents anticipate the first rate hike in Q2'15, while 40% say such a hike will come in the second half of 2015; the remaining 10% see it taking place in Q1'16.

Opinions diverged significantly on when the FOMC would begin shrinking the Federal Reserve's balance sheet by curtailing reinvestment of proceeds from its asset holdings. There continues to be near unanimity, however, that the FOMC securities purchases will cease by the end of 2014.

In a separate report released Tuesday, LPL Financial (LPLA) economist John Canally said, “We continue to expect the Fed to trim QE by $10 billion per month this year and to remain on pace to exit QE by the end of 2014.”

Canally says the broker-dealer expects the FOMC to “err on the side of keeping rates lower for longer. Markets should expect that the Fed will be content with keeping its fed funds rate target near zero until key labor market indicators make significant progress toward ‘normal.’ ”

Fading Business Optimism

In addition to lowering its GDP forecast, the SIFMA Roundtable lowered its business capital investment growth estimate for 2014 to 3.6% from 5%.

“Consumers are shouldering the burden of growth,” Swonk said.

“There’s been a real shift in the optimism of business investment, which has gone gone down versus the optimism of consumers,” she explained. “This is the continuing theme” that stands out in the SIFMA report.  

However, Swonk notes, housing figures tell a more mixed story.

While existing home sales are “stunning,” she says, new housing starts tell a “conservative” tale.

Overall, “It seems that the U.S. economy is making two steps forward and one step back,” she said. “It’s not heading out of the traffic jam at a pace most would like.”

---

Check out Gundlach: Likes Bonds, Not Homebuilders on ThinkAdvisor.

Reprints Discuss this story
This is where the comments go.

Related

Gundlach: Likes Bonds, Not Homebuilders

DoubleLine founder Jeffrey Gundlach prognosticates on gold, the dollar, bonds and more and expands on a view he says gets...