Morgan Stanley

Morgan Stanley's weak economic forecast should trigger stimulus, the opposite of what's coming

Morgan Stanley continues to predict a weak 1.4% growth for the US in 2013. I assume some of this pessimism has to do with the potential for a nasty fiscal slope. But this forecast mirrors their previous forecast in September, so nothing has changed in their analysis in the two months where policymakers crept closer to the slope. In other words, there’s something more structural at work. You can see that in the sharp pullback in investmentat the corporate level:

U.S. companies are scaling back investment plans at the fastest pace since the recession, signaling more trouble for the economic recovery.

Half of the nation’s 40 biggest publicly traded corporate spenders have announced plans to curtail capital expenditures this year or next, according to a review by The Wall Street Journal of securities filings and conference calls.

Nationwide, business investment in equipment and software—a measure of economic vitality in the corporate sector—stalled in the third quarter for the first time since early 2009. Corporate investment in new buildings has declined.

At the same time, exports are slowing or falling to such critical markets as China and the euro zone as the global economy downshifts, creating another drag on firms’ expansion plans.

That’s just unalloyed bad news for the economy. The global slowdown has moderated somewhat, but Europe remains stuck in recession, and China’s growth isn’t likely to reach the heights of previous years. I recognize that the slope has business types much more worried than consumers right now, and in addition they have an unsophisticated sense of how Washington works. The fact that investors have shifted around dividends and sold off capital gains to beat the possibility of higher taxes could have an effect on those investment statistics as well.

But I wonder if there’s not something more fundamental at work. Even with slope avoidance, we’re going to see a fiscal pullback at the federal level, with at least the payroll tax cut expiring. Growth has still not caught up to trend, and at this point we can confidently say it will never catch up. The latest round of quantitative easing petered out faster than any previous round in terms of its impact on the markets. We haven’t even seen the effects of Hurricane Sandy in the economic indicators, at least not to a serious degree.

And then there’s housing, seen as a bright spot. Housing starts lifted to the highest level in four years last month, at an annual rate of 894,000, well above expectations. But another way of saying this is that housing starts lifted to a level equal to the lowest point of every other post-recession fall since 1968. That’s how bad housing has been in the Great Recession to this point. In addition, a closer inspection of the numbers shows that single-family units actually fell slightly last month. The increase is entirely attributable to a boom in multi-family starts, a volatile indicator that often flies up and down.

What is true and undeniable is that increased household formation will allow housing to provide a positive impact on GDP going forward. That’s a recent trend, and if it continues – if twenty-somethings do move out of their parents’ homes at increased rates – then we could see a surge there. But that may only cancel out many of the other factors turning negative.

The larger point here – the economy could use some stimulus, the opposite of what it’s about to get.

Photo by Canadian Veggie under Creative Commons License