Morgan Stanley has reluctantly joined the ranks of the slow-growthers.
In a fresh note, Richard Berner has slashed his second-half U.S. GDP forecast to 2-2.5% from 3-3.5%. Basically, from 3.25% to 2.2%. That’s some serious damage.
From above- to below-trend growth: We are downgrading our outlook for 2H growth to 2-2.5% from 3-3.5% previously. This downgrade from above-trend to below-trend growth has important implications for our forecasts of the unemployment rate, inflation and monetary policy. More slack, lower inflation: Slack in the economy will likely widen slightly in this new outlook, implying a slower rise in inflation. The unemployment and housing vacancy rates may rise. So, while core inflation has bottomed, it may linger below the Fed’s comfort zone for longer.
Sources of weakness: Difficult diagnosis: We think that the main culprit for weakness relative to our forecast is less-than- expected support from global growth. But other factors – temporary loss of stimulus measures and hesitation resulting from policy uncertainty – likely also played a role.
The slow-down should end in 2011, however:
Implications for 2011: We don’t believe that this slowdown will last beyond 2H, much less morph into a downturn. Policymakers may take action, household balance sheets continue to improve, and we still think that net exports will add to growth. We see no reason to downgrade our 2011 forecasts, and even possible reasons to upgrade, especially if policy turns more stimulative.
Well, just like Deutsche Bank, Morgan Stanley seems to have gone a shade more bearish right ahead of yesterday’s ISM surprise (The note cited came out on September 1st) and stock market surge. Boy, they’ll be kicking themselves if their original forecasts turn out to be right.
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