By Diane Swonk
SIFMA's Economic Advisory Roundtable is composed of chief U.S. economists from several SIFMA member firms. Twice per year, the Roundtable publishes the results of a detailed survey on the U.S. economic outlook and rates forecasts.
Yesterday, the Roundtable released its "U.S. End-Year 2014 Economic Outlook," forecasting that the U.S. economy will grow at a 2.3% rate in full-year 2014 and 3.0% in 2015. The following is a Q&A with Diane Swonk, Chief Economist for Mesirow Financial Holdings, Inc. and Chair of the Economic Advisory Roundtable.
SIFMA's Economic Advisory Roundtable reduced its 2015 growth forecast from 3.1% to 3.0%. What factors contributed to the forecast?
We're forecasting the highest and strongest growth in a decade, but of course the threshold is low. It's important to understand that there has been a tendency to be optimistic, but it does appear that we've hit a pivotal point in the U.S. economy.
The consumer is still the driver of economic gains. State and local governments are also coming back. This is one of the key areas that most people miss when they think about our subpar recovery. We focus on construction and the housing market, but the state and local government sector has been a major drag on employment growth. The fiscal policy situation is now shaping up to be much less of a headwind, and potentially even a slight positive.
The one place that is still a disappointment is business capital investment, which we revised down and expect to remain lackluster next year. An underlying aspect of the forecast is that we're starting to see a lot of hiring in areas like consulting, compliance and cybersecurity. This hiring, although an absolute necessity in some cases, is actually a downside for business investment as it means siphoning off funds that firms could be putting into long-term bets on innovation. That's the price we are now paying for the security of the world in which we live.
The Roundtable does not expect the first hike in the federal funds target rate before the second quarter of 2015. What happens then?
Gradualism is the key here: the Federal Reserve wants to reassure a smooth and orderly transition, and avoid disorderly market corrections like the Taper Tantrum we saw in October. The Fed won't be moving at every meeting, but will instead move and then hesitate to make sure the markets can handle it. Overwhelmingly, the Roundtable thinks there is a mid- to late-2015 move and the consensus is for a 1% federal funds rate by the end of 2016.
What are the most important factors in determining when the FOMC will raise rates?
The Roundtable ranked inflationary pressures and inflation expectations as the most important indicators, followed closely by labor market conditions. This is not the Goldilocks economy where everything is just right - far from it. The Roundtable's number one concern is inflation, which is still low and has been below target for some time. The good news is that we are generating jobs and seeing a fall in the unemployment rate, just not enough to see sustained wage acceleration that allows the economy to reflate.
It's interesting that the survey pointed out some of the symmetry to inflation targets that markets don't seem to be pricing in: A period of below 2% inflation could be followed by a period of above 2% inflation. This is something we want to watch for as the Fed meets this week.
There's talk of global growth deceleration. What does this mean for the U.S.?
The bearish outlook is that 2015 could be a very scary year in terms of economic risk from the Eurozone and, to a lesser extent, geopolitical risks. A strong dollar and weak growth abroad are not a good combination.
We've seen a drop in oil prices recently, which was the Roundtable's most frequently cited upside risk to the economy. Is this a long-term trend?
The consensus of the Roundtable is this is a transitory factor, a reflection of oversupply rather than weak demand. Lower prices are helping the U.S. consumer, but the extent to which that continues starts to dwindle because we've become more resilient to higher oil prices.
The Republican Party recently won a majority in the Senate. What's the impact for our industry?
Little impact is expected from the elections. We may see less fiscal headwinds and more spending next year - the irony is there is some sense it will be the Republicans who loosen the purse strings. The recently passed bipartisan Continuing Resolution had some signs that 2015-2016 could be a year of reforms, including some clarifications to Dodd-Frank. We have also seen some easing of regulations.
How did you get involved with the Roundtable?
The Roundtable reached out to me a long time ago, and I've been involved ever since. The quality of the people makes my participation a no-brainer: the economists are top notch.
Read the full report (pdf) and press release. To view more SIFMA Research, please visit www.sifma.org/research.
Chair, SIFMA Economic Advisory Roundtable
Chief Economist and Senior Managing Director, Mesirow Financial Holdings, Inc.