Feroli Joins LaVorgna in Seeing U.S. Growth Intact Amid Rout
The U.S. economic expansion is sufficiently entrenched to overcome a short-term slump in stock prices and a cooling in emerging-market growth, keeping the Federal Reserve on track to reduce stimulus, economists say.
“You obviously don’t want to bring your GDP forecast around in relation to every day’s move in the market,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, who projects gross domestic product will expand 2.5 percent in the first quarter, the same as he forecast in early January. The drop in shares “is not enough to get us to think that our overall view on the economy is way off.”
That’s the view of 52 of 56 economists surveyed by Bloomberg today, who said the 5.8 percent decline in the Standard & Poor’s 500 Index this year through yesterday has no bearing on their first-quarter growth projection. All but two said the slump in equities didn’t affect their fundamental outlook for the world’s largest economy.
Improving household finances based on gains in home values and employment, combined with still-low interest rates and less-damaging government fiscal policy, will probably keep propelling consumer and business spending. The recent run of weaker data is more likely tied to bad weather, according to economists such as Aneta Markowska.
“When you step back and think about the fundamentals, nothing’s really changed,” said Markowska, chief U.S. economist at Societe Generale in New York. “The household balance sheet has still improved quite a bit. Other than the weather, it’s hard to explain fundamentally why the economy would suddenly roll over and take a turn for the worse.”
Global investors pulled $6.3 billion from developing-nation equities in the week through Jan. 29, the biggest outflow since August 2011, according to Barclays Plc, citing data from EPFR Global.
Strategists from Goldman Sachs Group Inc. to AMP Capital Investors and JPMorgan are also telling clients to hang on after losses that began with currencies in Turkey and Argentina spread to developed markets.
“Short-term forces in the U.S. point to continued growth in all major categories of demand, while the long-term EM growth story remains intact,” David Kelly, the chief global strategist at JPMorgan Funds in New York, wrote in a note to clients today. His firm oversees about $400 billion. “The plain fact is that very low domestic interest rates for investors holding the vast majority of global financial assets should continue to pull money away from fixed income and towards equities.”
Twenty-one strategists tracked by Bloomberg predict the S&P 500 will reach 1,956 this year, on average, representing an 11 percent increase from its current level.
Two Fed district bank presidents signaled today that faltering global stock markets probably won’t deter the central bank from further cuts in the pace of asset purchases.
“The hurdle ought to remain pretty high for pausing in tapering,” Richmond Fed President Jeffrey Lacker said after a speech today in Winchester, Virginia. Chicago’s Charles Evans said in Detroit that policy makers probably face “a high hurdle to deviate” from $10 billion cuts in monthly bond buying at each of their next several meetings. Evans and Lacker don’t vote on policy this year.
The decline in the S&P 500 this year follows a 30 percent surge for all of 2013, the biggest annual advance since 1997. The gain, along with higher property values, has boosted American balance sheets.
“We’ve had a 6 percent correction and we think the sky is falling, and I think that’s way too pessimistic,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. LaVorgna forecasts the economy will expand at a 3.1 percent rate in the first quarter. “You’ve created a tremendous amount of housing wealth. That, to me, is more tangible than equity wealth.”
Single-family home prices increased 11 percent in December from a year earlier, according to CoreLogic. Home values in 20 U.S. cities rose in November from a year earlier by the most in almost eight years, S&P/Case-Shiller data show.
Net worth for households and non-profit groups rose by $1.92 trillion in the third quarter to a record $77.3 trillion, the latest Fed data show. It increased $6.33 trillion from the end of 2012 through September.
“The accumulated wealth over the last year still dwarfs the wealth destruction that’s taken place in the last month” said Feroli, a former Fed researcher.
Concern over the momentum in the economy increased yesterday after a report showed manufacturing expanded in January at the weakest pace in eight months. The Institute for Supply Management’s report showed a measure of orders declined the most since December 1980 as “a number” of factory purchasing managers said adverse weather slowed business.
Last month was the coldest and had the most snowfall in three years, according to weather-data provider Planalytics. The East North Central region, which includes Michigan, Illinois and Ohio, registered the most snow in 35 years, the firm said.
Not all economists are holding steadfast on their forecasts. Christophe Barraud, chief economist at Market Securities LLP in Paris, said he cut his first-quarter growth estimate to 2.8 percent from 3.2 percent. The reduction has more to do with the damage the expiration of extended jobless benefits and bloated inventories will wreak on consumer spending and manufacturing output, than on slumping shares, he said. Barraud is the top forecaster of the U.S. economy over the past two years, according to data compiled by Bloomberg.
“We revised down to 2 percent from 2.3 percent,” said Michelle Meyer, a senior U.S. economist at Bank of America Merrill Lynch in New York. In addition to less inventory accumulation, “weather conditions remain challenging. The harsh winter weather likely depressed activity in the quarter.”
Fed policy makers will look past the short-term fluctuations caused by stocks, weather or the meltdown in emerging markets and continue to trim monthly bond purchases at the current pace, according to 45 of 50 economists surveyed. The Federal Open Market Committee last week reduced its monthly bond buying by $10 billion for the second straight meeting, cutting purchases to a pace of $65 billion a month.
“It’s way too early to start talking about the Fed,” said Jay Bryson, global economist at Wells Fargo Securities LLC in Charlotte, North Carolina, noting that the next meeting is in mid-March. “Just because emerging markets are having problems, that doesn’t cause the Fed to taper the taper. They’re not going to react to that. They view themselves as the central bank of the United States.”
The Fed will remain focused on lowering U.S. unemployment while keeping inflation under wraps, said Bryson. “They’re not going to be bailing out these other countries.”
Weaker emerging-market economies probably also won’t hurt U.S. growth via a slowdown in trade, according to Markowska.
“It’s actually very difficult for emerging markets to derail the U.S. economy because the trade linkages are not very important in terms of the exports,” she said.
As long as the slump in U.S. shares doesn’t exceed 10 percent, “this is a garden-variety correction,” added Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “I don’t think anything fundamental has changed in the economy.”