WASHINGTON (MNI) – The following are excerpts from SIFMA’s 2012
Mid-Year Economic Outlook, published Tuesday:
Members of SIFMA’s Economic Advisory Roundtable forecast that the
U.S. economy will grow at 2.1 percent rate in full-year 2012 and will
grow at a rate of 2.1 percent in 2013.1 This outlook is slightly weaker
than the Roundtable’s 2011 end-year prediction of a 2.2 per-cent growth
rate in 2012. Concerns over European sovereign debt and U.S. fiscal
policy dominate the outlook.
—
Unemployment was expected to remain at elevated levels throughout
2012 and 2013, with levels on pace with those forecasted in end-year
2011. Survey respondents expected the full-year average unemployment
rate to drop slightly to 8.1 percent in 2012 (compared to 8.2 percent
forecasted at end-year 2011), declining to 7.8 percent in 2013.5
Full-year 2012 non-farm payroll employment gains were estimated to total
1.9 million jobs;6 for 2013, the median ex-pectation was for a slightly
weaker addition of 1.8 million jobs. Consumer spending trends, how-ever,
were expected to weaken in 2013 despite a better employment outlook,
with personal con-sumption estimated to fall to 2.1 percent in 2013,
down from the 2.2 percent expected in 2012.
—
The median forecast for “headline” inflation, measured by the
per-sonal consumption expenditures (PCE) chain price index, was 1.8
percent for full-year 2012 and 1.7 percent for full-year 2013.11 The
median forecast for the core PCE chain price index was 1.8 per-cent for
full-year 2012 and 1.8 percent for full-year 2013.12 The outlook for
inflation continued to be moderate for 2012 com-pared to the end-year
2011 report. Over 85 percent of respondents did not believe inflation to
be a concern in 2012, with the balance expressing only moderate
concern.13 One factor contributing to the moderate outlook on inflation
from end-year 2011 was the unexpectedly weak May 2012 non-farm payrolls
report. This concern was reflected in answers from respondents with
economic slack/employment as the dominant factor in the inflation
outlook for 2012, followed by global conditions and fiscal policy as
factors. Several respondents noted that deflationary risk was higher
than before. One noted that, aside from the volatile commodities prices,
there were no real fundamental drivers for higher inflation.
—
Approximately 70 percent of survey respondents expected the Fed
Funds-to-ten-year Treasury yield curve to steepen over the remainder of
2012, while 60 percent expected the future path of the TED (Treasury
bill less LIBOR) spread to remain unchanged. Opinions were also split on
the path of investment-grade spreads, with half of respondents expecting
the spread to narrow, while the other half expected the spread to remain
the same. Approximately half of respondents expected high-yield
corporate spreads to narrow, a third to remain the same and the balance
to widen.
—
Quantitative Easing
The survey asked questions about further potential quantitative
easing by the Fed. The majority of respondents (65 percent) expected the
Fed to conduct further quantitative easing (QE3). When asked what
conditions would trigger further easing, respondents were generally in
agreement that subpar GDP and weak job growth, rising deflationary
risks, and potential contagion from Europe were the likely primary
triggers for a third round of quantitative easing. The timing for QE3
was expected to be near-term, with nearly all respondents who
anticipated further quantitative easing expecting an announcement at the
June 20, 2012 FOMC meeting and action to be taken in June to September
2012. While a majority of respondents that anticipated QE3 expect the
Fed to act through purchases of long-term securities such as Treasuries
and agency mortgage-backed securities (MBS), a small minority (17
percent) expect the extension of “Operation Twist” instead.
—
U.S. Economic Growth
EU Risk Dominates the Downside The European debt crisis,
normalization of private credit markets and self-correcting adjustments
by business and real estate markets remain the three most important
factors impacting U.S. economic growth. Lower oil prices and an
unexpected increase in consumer demand were the most oft-cited upside
risks to economic forecast. Other positive factors were job growth, the
recovery of the housing market and a positive resolution of the fiscal
cliff. On the downside, contagion from European sovereign debt and
banking crisis remained the domi-nant factor cited, with 75 percent of
respondents listing it among their top downside risks. When asked about
how the European debt crisis would impact U.S. GDP growth over the next
twelve months, 90 percent of respondents opined that it would lower GDP
growth by up to 100 basis points (bps). In particular, approximately
three fourths of respondents expected the possible exit of Greece from
the euro to lower the value of the euro vs. U.S. dollar, U.S. interest
rates and U.S. GDP growth, with the remaining quarter of respondents
remaining neutral on the impact to the U.S. A respondent noted that the
situation in Europe would likely continue to fester for some time, and
a Greek default and exit would be “messy, but … need not be inherently
destabilizing for the global financial system.”
—
Falling Off a “Fiscal Cliff”?
The “fiscal cliff” was the second most frequently cited downside
risk. Recent discussions among policy makers and in the media have also
focused on the so-called fiscal cliff that the U.S. econ-omy is
heading toward at the end of 2012 and beginning of 2013. This fiscal
cliff encompasses four policy issues: (1) expiring tax cuts; (2) the
debt ceiling; (3) appropriations; and (4) sequestration. The majority of
respondents believed that of the four factors, expiring tax cuts would
have the greatest negative impact on the U.S. economy, followed by
sequestration, appropriations, and lastly the debt ceiling.
Three-quarters of respondents believed that the uncertainty over the
potential im-pact of the fiscal cliff would lower GDP growth by up to
100 bps in the next six months, while 15 percent believed there would be
no impact; the balance believe that the uncertainty would lower GDP
growth by more than 100 bps.
All survey respondents opined that some attempt would be made by
Congress to mitigate the “fiscal cliff,” with the majority expecting a
temporary extension of the Bush era tax cuts. A few respondents expected
either reductions in, or the outright elimination of, sequestering as
well. Several commented that most, if not all four aspects of the
fiscal cliff will be postponed. Respondents generally expected some
form of a budget plan, similar to the framework put forth by
Bowles-Simpson, or a gradual phase in of fiscal cuts. Respondents
predicted that congressional action is highly dependent on the November
elections, and that the only action they might take is a short term
postponement. Nearly all respondents opined that uncertainty over fiscal
policy will continue to negatively impact GDP growth in 2013, split
fairly evenly between those expecting a negative impact of up to 100 bps
and those expecting a negative impact of over 100 bps.
—
Oil Prices
Panelists placed approximately a 70 percent chance on WTI oil
prices remaining below $100 per barrel in 2012, with a 25 percent chance
of prices moving into the $101 and $150 range and only a 5 percent
chance for oil prices moving above $150 per barrel. The most likely
scenario oil prices remaining below $100 per barrel would have an
estimated effect of boosting GDP growth by one-fifth of a percentage
point. The $101 to $150 per barrel scenario was predicted to reduce GDP
growth by approximately a tenth of a percentage point, while the $150+
per barrel scenario would have the effect of reducing GDP growth by
two-fifths of a percentage point. Panelists noted that slower global
growth and weaker demand would put downward pressure on oil prices.
** MI Washington Bureau: 202-371-2121 **
[TOPICS: MAUDS$,M$U$$$]
