Economic Outlook (Part 7) -- Forecast Summary

Part 1 (overview) of this 7-part series, which is taken from a recent presentation I made at UCLA, can be found here. Part 2 (monetary policy) can be found here. Part 3 (fiscal policy) can be found here. Part 4 (economic fundamentals) can be found here. Part 5 (market fundamentals) can be found here. Part 6 (commodity watch) can be found here.


Political winds continue to shift in favor of fiscal austerity, with a strong emphasis on cost-cutting rather than higher taxes. This may add to short-term anxiety (Keynesians will argue that austerity is a negative for growth), but will ultimately prove beneficial (reduced government spending frees up scarce resources for the more efficient private sector).


Inflation will trend slowly higher.


Real growth will average 4% or better.


The Fed will raise rates sooner than the market expects (only one 25-bps tightening is expected by the end of this year).


Residential construction will slowly improve.


10-yr Treasury yields will rise to 4.5% or more.


MBS spreads will widen as yields rise. 


Credit spreads will hold current levels or continue to narrow. 


Equity prices will rise 10-15%. 


Commodity prices will post moderate gains.


The dollar will rise against most currencies.


Markets are still pricing in a lot of bad news, and there are a number of serious concerns weighing on sentiment (e.g., fiscal policy, monetary policy). As the US economy continues to grow in spite of these concerns, and policy uncertainties are resolved favorably, there is lots of room for improvement in asset prices.