Morgan Stanley's Bear Case For The US Economy
While Morgan Stanley's lower-than-consensus economic expectations for the US economy splits the difference between an economy where people remain hesitant to take on risk, essentially extending the post-crisis pall, and one where they embrace risk in the manner of a more typical post-WWII cyclical expansion; their alternative scenarios (at either corner of the goldilocks world) make one wonder just what the catalyst will be to release the kraken of better-than-subpar growth...
Via Morgan Stanley,
Typically, a comparison to consensus helps put our forecasts in perspective. At the time our forecast went to publication, however, consensus surveys were only available through May. That means consensus has incorporated only the initial reading on Q1 GDP (reported at +0.1%), which dragged down full-year estimates by 0.3 percentage points according to the Blue Chip Survey of professional forecasters. Since then, the BEA's second estimate of growth in Q1 has the economy declining by a full percentage point. Incorporating that result will no doubt pull down consensus full-year 2014 forecasts even further.
Having taken into account the latest reading on Q1 GDP, our full-year estimate for 2014 has fallen to 2.1%Y compared with the May Blue Chip consensus of 2.4%Y. Consensus surveys indicate forecasters largely have not changed their outlook beyond 1H14, and nor have we. As such, our forecast for 2015 real GDP growth remains at 2.8%Y compared with consensus at 3.0%Y.
Our baseline forecast splits the difference between an economy where people remain hesitant to take on risk, essentially extending the post-crisis pall, and one where they embrace risk in the manner of a more typical post-WWII cyclical expansion. Our alternative scenarios go to either corner.
The bear case envisions households remaining reluctant to spend out of the additions to their wealth, instead continuing to focus on balance sheet repair. Business leaders continue to find the risk-reward trade-off more favorable for return of capital versus return on capital, thus limiting the scope for even a modest pickup in capex. Externally, global growth flags, which translates into a hit to US exports, and evidence builds that deflationary pressures are being imported from abroad. In this scenario, the economy is unable to break out of its 2% growth path and the Fed delays the date of first tightening well beyond our baseline expectation.
The bull case considers a typical cyclical pickup in growth with US households re-leveraging and, in response, business investment kicking into overdrive. Additionally, this scenario coincides with a global pickup in growth, which translates into a boost to US exports. Growth averages above 3.0% over the course of 2014 and 2015. Stronger growth and inflation lead the Fed to begin hiking rates aggressively in early 2015.
So given all of that... we can't help but read that "bear case" scenario as very much the status quo and wonder what it is that all the Sell-side sees as the new normal catalyst for a change to "this time is different."
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