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US Macro Outlook: Long Live the Expansion

Global slowdown may shave US economic growth, but year-end momentum should be sufficient to keep Fed plan to raise rates this year on track.

Some highlights of the US path to economic recovery: (at home) political gridlock, bad winters, a weak job market, stagnant wages, nervous corporates and skeptical consumers; (abroad) Europe’s fiscal struggles, and now the prospect of a worsening slowdown in key emerging markets (Read about the global macro outlook).

The current US recovery has bent under these headwinds, but it has not broken. Growth has been slow, low and sometimes shaky, but it has stretched into what could become the longest business expansion on record. According to Morgan Stanley’s US economics research team, recent market volatility hasn’t changed the fundamental outlook.

In fact, domestic momentum should prove sufficient to allow the Federal Reserve to begin raising its key interest rate in December, says Chief US Economist Ellen Zentner, as downside risks for inflation—the strength of the dollar and low oil prices—begin to ease. Her team has shaved its estimate for 2015 economic growth to 2.4%, from 2.5%.

“With this forecast update, the ‘lower, but longer’ argument for US economic growth has only strengthened,” she says, adding that macro signs of overheating are few and far between.

After that, however, the going could get tougher. Zentner’s team has reduced its 2016 growth forecast from 2.7% to 1.9%, owing to the weaker outlook for global trade and lower labor productivity gains. As a result, she is also expecting a slower rate of Fed tightening for 2016.

From a strategy standpoint, Adam Parker, Morgan Stanley’s Chief US Equity Strategist, still believes that growth trumps value. “When you compare the growth and value universe on a host of metrics—including valuation, capital use and profitability, growth and sentiment, capital structure and leverage, our timing indicator, and macro factor sensitivity—the case for moving to value isn’t compelling today,” he says. However, given the macro headwinds, he has trimmed his base-case 12-month target for the broader S&P 500 Index to 2200, from 2275.

“More than six years into the current US business expansion, the world remains a scary place,” Zentner says. There are bright spots for investment growth, however, in commercial building and research and development activity.

In addition, American families continue to bounce back from a historic housing market collapse. Household formations are rising; credit conditions are improving, making residential investment another potential engine for economic growth.

For more Morgan Stanley Research on the US economic and strategy outlook, ask your Morgan Stanley representative or a Financial Advisor for the reports “US Economic Autumn Outlook: Sobering Up On Supply Side” (Aug 31, 2015) and "US Equity Strategy: #Freethemarket or Good Is Bad and Bad Is Bad” (Sep 8, 2015). Plus, explore more Ideas.

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