Morgan Stanley: Prepare for ‘Inflection Point Midway Through 2013’

Thursday, 14 Mar 2013 09:20 AM

By Michael Kling

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Get ready for an “inflection point” in the economy this year, advises Morgan Stanley.

“The trajectory of economic activity marks an inflection point midway through 2013,” write Morgan Stanley analysts in a research paper.

Although the economy is currently being held down by “fiscal consolidation,” real gross domestic product (GDP) growth will jump to about 2.75 percent in the second half of the year, they predict.

Editor's Note:
Billionaires Dump Stocks. Prepare for the Unthinkable.

“Indeed, the resilience of the private sector in our market economy probably would have been more evident by now had not Washington politics intruded.”

Their forecast does not include any political resolutions in Washington, they note. Their forecast is based on the sequester’s across-the-board spending cuts crimping economic growth.

“We are not optimistic that harmony will suddenly break out in the halls of power,” the paper states.

“More likely, politicians will muddle through with extensions of budgetary and debt-issuance authorities.”

In their bear scenario, the government would shut down temporarily in late March due to political impasse.

In their bull case, Washington would grab the “low-hanging fruit on the fiscal tree. Means testing of benefits, an occupationally sensitive stretching of the retirement age and rationalization of the tax structure would be an enormous plus for economic efficiency.”

The unemployment rate will move sideways this year and drop half a percentage point next year, and the Federal Reserve will continue its security purchases through this year, the team predicts.

“Early next year, [the Fed] will likely taper off those purchases, stop net acquisition midyear and let the balance sheet shrink organically later in 2014.”

They also predict the housing recovering will probably remain weak, and lending standards, while easing, will still remain tight. In addition, rising gas prices will prompt higher inflation in the near term, but over time inflation will settle to just over 1.5 percent.

Analysts’ consensus forecast calls for economic growth to fall to about 1.5 percent or less to take into account government spending cuts. Those analysts are too pessimistic, argues Kiron Sarkar, an investment advisor based in London.

“They correctly note that sequestration will crimp U.S. growth, shaving perhaps 0.5 percent from GDP,” Sarkar argues in an article for MarketWatch. “But current positive momentum is enough to keep the economy growing.”

Several factors bode well for the U.S. economy, Sarkar says. Employment, most notably, in the construction and retail sectors, is up, the housing market is recovering and lending standards are easing. “The improvement in the residential housing market is probably the largest feel-good factor out there.”

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

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