As the year winds down, Wall Street’s research departments are rolling out their forecasts for 2014 and even 2015.
UBS’s U.S. economics team unveiled their 2015 GDP forecast on Monday.
“Despite a slow economic recovery through 2013, U.S. growth still is expected to pick up,” they noted. “After currently forecast 3.0% growth in 2014, we now project 2015 growth to also be 3.0%.”
Central to their accelerating growth thesis is the idea that the fiscal drag will become less and less onerous. And this will be offset by a Federal Reserve that begins to tighten monetary policy.
This is a theme we expect to be common across most economic forecasts. Indeed, UBS’s 3% growth expectation represents the median expectation among Wall Street economists.
Waning fiscal drag helps permit gradually tighter monetary policy
A slower than normal economic recovery has partly reflected public sector restraint following the temporary fiscal stimulus from the American Recovery and Reinvestment Act of 2009. Fiscally strapped state and local governments cut spending in the following three years, and Federal spending started to decline in 2011. In 2013 Federal spending has been squeezed by the spending sequester beginning in Q2(13). Looking ahead, the sequester should exert less incremental Federal spending restraint in 2015 after required lower spending levels are achieved in 2014. At some point before 2015, both major political parties probably will agree on longer-term gradual Federal deficit reduction steps that should preclude further sharp sequester-related spending cuts from already low 2014 levels. At the same time, state and local spending should be recovering.
In 2014, the Federal Reserve led by a presumptive new Fed Chair Janet Yellen is expected to begin tapering its monthly QE securities purchases, which are expected to be terminated by the end of the year. By mid-2015, we expect the Fed to start gradually raising the Federal funds rate to 0.75% by the end of 2015. In this setting, the benchmark yield on the 10-year Treasury note is projected to rise to 3.2% by the end of next year and 3.5% by the end of 2015.
UBS warns prolonged fiscal restraint would certainly be bad news. Furthermore, Obamacare could discourage hiring by small businesses.
Otherwise, there appear to be plenty of reasons to be measuredly optimistic about America’s near-term future.
Like we said earlier, UBS’s 3% growth forecast for 2015 represents Wall Street’s median. According to Bloomberg, Deutsche Bank sees 3.5% growth, Citi and Goldman Sachs see 3.2% growth, Nomura sees 2.9% growth, and Morgan Stanley sees 2.6% growth.
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