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US Rules World for Next 7 Years: Wilmington Trust

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Something to look forward to over the next seven years: the continuation of the U.S. as dominant global economic powerhouse, or so says Wilmington Trust.

Wilmington Trust’s Investment Strategy Team released its annual seven-year capital markets forecast report titled “Brave New World, Reserved Expectations” during a conference call with press last week.

In order to look forward, Wilmington Trust first looked back at the past seven years.

“Starting with the bursting of the housing bubble in 2007, followed by the collapse of some financial and mortgage giants, the U.S. plunged headlong into a recession in 2008, characterized by a dangerous lack of liquidity and credit,” the report states. “With a federal funds rate at or close to zero, the Federal Reserve went a step further into uncharted territory with its exceptionally loose monetary policy program known as QE, or quantitative easing — three phases of expanding its balance sheet by adding new assets and liabilities that would successfully keep the economy from entering a deflationary spiral.”

Fast forward to today, and the U.S. is a global economic leader. And Wilmington Trust expects this to continue.

“The U.S. has re-emerged as the dominant global economic powerhouse, and we believe that will continue to be the case — and increasingly be the case at least for the first half of our forecast time horizon,” said Tony Roth, Wilmington Trust’s chief investment officer, during a conference call on Wednesday.

In Wilmington Trust’s seven-year forecast, the firm envisions a strengthening U.S. economy — which the firm predicts will be marked by both steady, positive developments as well as persistent challenges, resulting in a “prolonged, subdued recovery.”

As Roth said during the conference call, “We’re seeing positive development overall in economic growth, employment [and the] U.S. dollar — which surely does act as, what I would characterize as, a minor headwind relative to the underlying domestic economic strength that we’re seeing.”

Wilmington Trust expects the U.S. currency to continue to appreciate in “real (post-inflation) terms” against currencies of developed market counterparts for the foreseeable future. International currencies like the euro and yen, which have undergone central bank policies in Europe and Japan, are likely to reduce further in value, the report states.

A strong dollar means increased capital flows into the U.S., which Wilmington Trust says bodes well for domestic stock prices. A strong dollar also means higher prices to foreign buyers of U.S. goods and services.

The report notes that “some combination of lower exports or a lower dollar is likely over the back half of the seven-year timeframe.”

In addition to a strong U.S. dollar, Wilmington Trust attributes the U.S.’s prominence to the the manufacturing recovery — thanks to technical innovation, robotics, flexible labor laws and increased availability of natural gas supplies — as well as the increased availability of natural gas supplies and the recent drop in oil prices.

Thanks to increased domestic and international supply, oil prices have been on a steady decline, which means consumers’ gas dollars can be spent elsewhere. The report states that “the downward pressure on energy prices is a harbinger for long-term benign inflation expectations, as well as modest growth expectations stemming from higher oil demand.”

That’s not to say all is hunky-dory with the U.S. economy. Roth noted during the conference call that there are persistent challenges in the economic recovery. “If you look at the rate of recovery, the level of domestic growth compared to past recessions, it certainly has been a subdued recovery,” Roth said during the conference call. “If you look back to World War II, the longest economic cycle that we’ve seen has been around 10 years — that is, the longest period we’ve gone without seeing a recession — and we think that we could really have a period here that is a longer recovery than we’ve seen in the past.”

In its report, Wilmington Trust outlines some of the challenges the U.S. still faces, like the job market and sluggish housing market.

Despite increases in job openings that have helped offset fears of “excessive labor market slack depicted by low labor force participation,” as the report states, labor market slack has remained elevated. And Wilmington Trust predicts the labor market slack will persist as the population ages and an increasing number of baby boomers retire.

Regarding the housing market, Wilmington Trust predicts headwinds should persist for the medium and long term. Challenges within the housing market, according to the report, are underwater home values, lending obstacles and first-time homebuyers constrained by student loan debt.

“A big shakeup in the still-wobbly housing segment that could reignite the housing crisis is reason enough for the Fed to be very cautious in raising interest rates,” the report said. ‘The slow pace of income growth and modest price pressures are other reasons we expect the Fed will take its time in raising rates.”

Other expectations in Wilmington’s seven-year forecast:

  • Persistently low inflation, which the firm says should keep both yields and returns for fixed income investments relatively modest.
  • Mexico, Korea, and Southeast Asia — including Indonesia, Thailand, Malaysia and the Philippines — should develop and come to the forefront fairly quickly because these regions are implementing many of the economic models that made China work. “These are export-driven economies and low-cost producers with sources of cheap labor that should eventually start to work their way up the food chain,” the report states. “Brazil is still held back by finger-pointing and a lack of initiative, in our view, but some of its neighbors could fare quite well.”

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