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Sustained Economic Growth, Bifurcated Economy, Positive Surprise on Deficit Among Predictions at CFALA’s 2014 Economic and Investments Forecast Dinner

Differing outlooks on economic growth and a prediction that an improving federal deficit may boost business optimism later this year were among the views shared by panelists at CFA Society Los Angeles’ 2014 Economic and Investments Forecast Dinner.

The U.S. economy is in the midst of an expansion that may last another three to five years, Nancy R. Lazar, co-founder of Cornerstone Macro and leader of the firm’s Economic Research team, told attendees Thursday at the dinner, which was moderated by Los Angeles-based CNBC business news reporter Jane Wells.

“We think the U.S. economy has entered a self-sustaining expansion, and no longer needs the crisis-related monetary stimulus we have had,” Lazar said. “We believe the Fed also sees a solid expansion, and we expect the Fed to continue to taper. U.S. domestic growth is likely to be driven by the private sector, and we’ve raised our forecast for real GDP growth in 2014 from 3% to 3.5%. Growth in capital spending, which slowed in 2013, is likely to accelerate in 2014, and consumer spending is also likely to accelerate from 2.5% year over year in 4Q of 2013 to 3% in 2014.”

“The housing, energy and manufacturing sectors are all doing well,” said Lazar, who has been an Institutional Investor-ranked economist for the past 12 years, and ranked #2 for the past four years.

“Housing is experiencing a recovery that could continue for three to five years, fortified by pent-up demand,” she said. “Housing growth may be a little slower this year, primarily due to the increase in mortgage rates and sharply higher house prices relative to income, and also because lending standards may get a little tighter given all of the rules and regulations coming out of Washington.

“The U.S. is probably the leader in global economic growth, and we’re seeing a decoupling between U.S. economic activity and emerging economies, such as China, India, and Brazil, where growth is slowing significantly. My favorite emerging market is ‘Middle America’, where the renaissance in the energy and manufacturing sectors are giving a big boost to the middle part of the country. We have identified 15 states that are really leading the recovery, including energy states such as Texas, and manufacturing states like Michigan.”

Small businesses, which account for about half of private GDP and employ more than half of the private workforce, are not doing well, said Dr. William C. Dunkelberg, Chief Economist for the 350,000-member National Federation of Independent Business.

“I focus my analysis of the economy by looking at small business, which the SBA defines as companies with fewer than 500 employees – that’s 99% of all employer firms,” Dunkelberg said. “In the recovery, we have seen a bifurcated economy. Big firms are doing well, mostly because they can export and make money overseas, and the stock market reflects that success. By contrast, small firms are doing very poorly. This produces an average growth of 2%.

“Small business owners remain pessimistic about the future, with more expecting the economy to deteriorate over the next six months than those who think business conditions will improve. The NFIB Small Business Optimism Index is still in the doldrums, at 93.9 in December, well below the pre-recession average of 100 and atypical of recoveries in the past, where the Index is well above 100.”

Dunkelberg expects sub-par economic growth, with much of the blame going to Washington.

“A huge source of uncertainty emanates from Washington,” he said. “Two-thirds of small business owners say this is a bad time to expand, and 30% of them blame the political climate. Only 10% think this is a good time to expand, well below average. Obamacare is a big part of that. Taxes and regulations and red tape are top concerns, and the President keeps promoting higher taxes. Regulations are hitting the Congressional Record at a record pace, and the President is running the economy by fiat.

“Consumers are not happy and if they don't spend, businesses don't hire or order new inventory. Only 1 in 10 in the Michigan surveys think government is doing a good job, and that’s not an environment that is supportive of a lot of growth. Employment is still below its 2008 peak. So all in all, I’m expecting growth in the mid-2% range, not much inflation, and not much job creation.”

Perhaps surprisingly, the environment in Washington remains positive for the economy and the market, said Greg Valliere, Chief Political Strategist for the Potomac Research Group and a 30-year observer of Washington politics.

“One of the big surprises I expect later this year is a sharply revised estimate on the budget deficit,” Valliere said. “The deficit is coming down dramatically, and while that is not widely appreciated in Washington it will become apparent later this year. At the same time, I don’t see another big crisis – a debt crisis, a default crisis or a government shutdown. That said, I also don’t see things getting a lot better in terms of getting much legislation passed on tax reform or immigration reform, largely because it’s an election year and partisan passions are even stronger.”

The economy continues to benefit from both monetary and fiscal policies, Valliere noted.

“We have a very accommodative Fed, along with fiscal restraint, which will persist as long as Republicans control the House,” he said. “As far as the elections, Republicans are in some disarray. The Democrats are more united, but the stars are not aligned for them to do well in the fall. The House will stay Republican, partly because of the way the districts are drawn, but also because of public antipathy towards Obamacare. In the Senate, if the Republicans gain six seats, they would regain control, and I think it’s quite likely they will gain at least four or five seats because those races are in states that Romney carried.

“So, the election will result in Congress staying conservative or possibly becoming more conservative. That means more fiscal restraint and flat budgets in the future. If budgets are not growing and revenues are rising, you’re getting closer and closer to a balanced budget. Fiscal restraint has produced the desired results, the deficit is plunging and economy is getting better. However, neither party wants to acknowledge that the economy is improving – the Republicans because that would give Obama credit and the Democrats because they want to spend more money on various programs. The press is partly to blame too, since they focus more on bad news than good.”

CFALA’s annual forecast dinner benefits the California Council on Economic Education, which provides economic and financial literacy education to K–12 teachers and students to help them make better personal and financial decisions, improving students’ ability to succeed and compete in the global economy.

Founded in 1931, CFA Society Los Angeles (CFALA) is a network of investment management professionals that works to disseminate useful financial information and increase awareness of the value of the Chartered Financial Analyst (CFA®) designation, which is intended to lead the investment profession by setting the highest standards of ethics, education, and professional excellence.