Economic growth projected to be slow in remainder of 2015

The U.S. economy is doing better after a sluggish first few months, but the growth overall this year will be only modest, forecasters say.

The U.S. economy got off to a slower start in the first part of the year than they had expected, but an uptick is now occurring, they say. Still, the sour first quarter will mean gross domestic product growth will not be as high as they had predicted to Pensions & Investments in December.

Another question is whether turmoil in China's stock markets and the Greek debt crisis could potentially dampen domestic economic growth and consumer confidence, several noted.

Eric Lascelles, chief economist with RBC Global Asset Management in Toronto, said one-off events drove U.S. GDP down in the quarter ended March 31 by 0.2%. Snowstorms on the East Coast and the port strike in Oakland, Calif., worked against economic growth. At the start of the year, Mr. Lascelles had predicted U.S. GDP growth of 3.2% for 2015. He now says the slow start means a growth rate of 2.5% this year.

“It's going to be a diminished year,” Mr. Lascelles said. He added in a later e-mail that the downgrade already accounted for what are not unexpected events in Greece and China.

“Keep in mind that Greek problems were clearly coming to a head this summer, while China has been on a downward economic trajectory for several years,” Mr. Lascelles said.

Despite only modest growth, the U.S. economy still is the brightest in the world, said economist A. Gary Shilling. He still believes U.S. GDP will grow only 2% in 2015, adding that it is better than Japan and Europe, where only 1% GDP growth is expected.

Mr. Shilling, president of A. Gary Shilling & Co. Inc., Springfield, N.J., agreed that the Bureau of Labor Statistics number showing the first-quarter GDP contraction won't be the trend for the rest of year, adding that the decline was an aberration due to one-off events.

Mr. Shilling said more jobs are being created and wage growth is starting, so he sees good news for the rest of the year.

Richard Lacaille, London-based executive vice president and global chief investment officer at State Street Global Advisors, is also optimistic that GDP will grow in 2015. Like Mr. Lascelles, Mr. Lacaille blamed the first-quarter GDP contraction on the snowstorms and the port strike.

But moderate economic growth in the U.S. means the Federal Reserve is expected to start raising interest rates in the fall, which won't be good for stock market returns, ending several years of double-digit returns, forecasters said.

“You are on par for a single-digit year,” said Russ Koesterich, San Francisco-based managing director and global chief investment strategist for BlackRock Inc.

Mr. Koesterich said he is not changing his December projection that the S&P 500 will grow by 7% this year, even though it was up only 1.23% in the first half.

He said increases in hiring and a modest but concrete pickup in wage growth should help drive up stock prices for the remainder of the year.

However, U.S. equities, he said, will be hurt if the Federal Reserve tightens monetary policy and raises interest rates in the fall while other countries continue quantitative easing polices.

“Why U.S. equities are doing mediocre and why they are underperforming the rest of the world ... — if you compare the U.S. to Europe, to Japan — is that you are losing the tailwind of monetary accommodation from the Fed,” he said.

Mr. Koesterich said it will be at least another 18 months before the European Central Bank and the Bank of Japan make similar interest rate hikes, so stock markets in those regions likely will outperform U.S. stocks by year-end.

He said only the Bank of England could be following the Fed in the next few months in raising rates.

Mr. Koesterich added in a subsequent e-mail that the slumping Chinese stock market provides limited risk to the U.S. economy, but the Greek debt crisis developments loom larger.

“While we believe the ECB can contain the contagion, a Greek exit may inhibit credit creation in Europe, thereby exerting some drag on the economy. This would impact U.S. exporters to Europe,” he said.

The global script that BlackRock assumed late last year generally has played out: inflation has been low and equities markets have performed better than bonds.

Mr. Koesterich also said investors should be prepared for increased volatility in the stock and bond markets because of rising interest rates.

Erik Knutzen, multiasset CIO at Neuberger Berman Group LLC in New York, said the firm's asset allocation committee believes that even though the Fed is looking to increase rates, corporations are benefiting from healthy margins while inflation remains benign. He added that some data show improving growth prospects that favor small-cap stocks.

“Elsewhere, we prefer developed market equities to emerging counterparts, given the positive impact of ECB and Bank of Japan monetary policy, and the challenges faced by emerging economies tied to low commodity prices and weak demand for manufactured exports,“ he said. “Within bonds, we like credit over core developed market sovereign debt.”

Mr. Knutzen said the asset allocation committee's recommendations are all relative.

“It's worth remembering, however, that these are relative choices in an overall environment of reduced return outlook,” he said. “Although investors appear to be appropriately incented to take risk in risky assets relative to government bonds and cash, absolute-return outlooks are lower for all investment categories. This may present myriad challenges for investors as they seek to achieve long-term investment goals.”

He noted that return expectations are muted by low-to-moderate expected economic growth, low yields and low inflation expectations combined with valuations that are fair to rich.

Mr. Knutzen added in an e-mail that he didn't see the turmoil in Greece and China “materially changing our outlook for the U.S. economy for the next 12 months.”

Mr. Shilling said part of the reason for modest growth in 2015 is that while employment and wages have been rising slightly in the U.S., consumers are focusing on savings.

“We are in an age of deleveraging,” he said. “Consumers are still working on excessive debt. I think it takes a decade to work it off.”

Mr. Shilling said, for example, the slide in gasoline prices in November produced a windfall for consumers, but didn't trigger consumer spending.

In a later e-mail, Mr. Shilling noted that recent international developments could dampen growth.

“Many people are aware that we are in a global economy and weakness abroad does spread to the U.S. via weaker American exports and downward pressure on equity markets.

“Therefore, troubles in Greece and China do tend to depress U.S. consumer confidence and economic growth,” he said.

But Timothy Hopper, a managing director and chief economist at TIAA-CREF Asset Management, New York, said, “recent media coverage of the problems currently facing Greece and China should have little impact on U.S. consumer sentiment or our trend growth rate.”

Edward Keon, managing director and portfolio manager at Quantitative Management Associates, Newark, N.J., agreed that the double-digit returns the equities markets produced after the financial crisis are over. He said returns for 2015 and the foreseeable future will be about 6%.

Mr. Keon said while the U.S. economy is improving and hourly wages are starting to rise, paying employees more could hurt corporate profits: “This may be the first year in a while that it is better for Main Street than Wall Street.”

Mr. Keon also does not see interest rates rising rapidly, saying “3% is the new 6%. We believe that rates are likely to stay low, compared to what they have been over the last 50 years.”

The expected Fed rate hike likely will come in September or December and will be modest, in the range of 25 basis points, Mr. Hopper said.

Bigger increases are likely in 2016, in the area of 100 basis points, as the Fed slowly moves interest rates upward, Mr. Hopper said. n

Staff reporter Rob Kozlowski contributed to this report.