Photo: Bloomberg TV
BofA Merrill Lynch just had its 2012 mid-year press conference with a line-up of some of their top macro analysts.Michelle Meyer, senior U.S. economist, presented her outlook on the U.S. economy.
Here are the key talking points on GDP growth, Fed action, housing:
- GDP: Meyer is holding on to BofA’s below-consensus forecast and expects this recovery to be slow. Consensus forecast is for GDP to mid to low-2% growth in the second half of the year. The house view however is 1.3% in Q3 and 1.0% in Q4.
- Three reasons for below-consensus growth (i) This is a very different business cycle because it was a balance-sheet recession, credit markets aren’t operating like they normally do, housing isn’t contributing to recovery; (ii) the ‘Fiscal Cliff’ – What’s crucial to growth is not the size of the cliff, but the reaction to the coming cliff. The uncertainty that will filter into business and consumer decisions will likely cause a slowing in corporate spending and slow the pace of hiring. (iii) Spill-over from Europe.
- Monetary Policy: “The Fed will re-engage. We don’t think the Fed will sit idle in this environment”. The next move will be to extend the cautious forward guidance, as early as August, but more likely in September. Low interest rates could be extended to mid-2015 or late-2015 depending on data.
- “QE3 is a real possibility”. QE3 could be about $500 billion and be concentrated in mortgages and could come in the September FOMC meeting.
- Fiscal Cliff: The total size of the ‘Fiscal Cliff’ is about 4.5 per cent of GDP ($720 billion). The measures in the fiscal cliff that are very contentious or what Meyer refers to as the “Battleground” include the payroll tax cut, extended unemployment, debt ceiling #2 (sequester), Bush tax cuts, and Obamacare taxes. Most of the struggle will be with the sequester and Bush tax cuts.
- The Actual Fiscal Cliff: Lame duck Congress will likely enact stop-gap measures that should prevent the 4.5 per cent fiscal tightening. The actual shock to the economy should be about 2 per cent.
- Housing: There are some signs of life in the housing market but we can’t depend on it to save the economy. “We can look to the housing market to at least stop contracting from growth and start to add in certain sectors”.
- Home Prices: Home prices have bottomed at a national level but bottoming is different from a strong, sustained recovery. It is going to be a “bumpy bottoming” and a “true turn” will come in 2014 and 2015 once more foreclosures have been cleared, and once the economy is stronger. Housing starts will gradually increase this year and the next. The overall level of housing starts is at a historically low level and therefore account for a smaller share of the economy. For there to be a significant impact, there needs to be a real bounce. Construction will add 0.2 percentage points to GDP this year.