Washington Trust report: Probability of recession low

A recent economic and financial market review released by members of Washington Trust Wealth Management predicts the U.S. economy should continue to grow at a rate of 2 to 2.5 percent.
A recent economic and financial market review released by members of Washington Trust Wealth Management predicts the U.S. economy should continue to grow at a rate of 2 to 2.5 percent.

WESTERLY – The U.S. economy should continue to grow at a rate of 2 to 2.5 percent, housing sector improvements will likely go on for another couple years, but capital spending could remain weak, as the Fed is likely to stay accommodative with interest rates due to uncertainty overseas.
That’s according to a recent economic and financial market review released by members of Washington Trust Wealth Management.
“The probability of a recession over the next 12 months still appears low, although one could argue risks are slightly more elevated due to soft global growth and slowing job gains,” according to the report.
The wealth management division of Washington Trust Bancorp Inc., based in Westerly, says consumers continue to be “the engine of U.S. economic growth,” as it predicts consumption will grow from 1.6 percent in the first quarter to about 3.5 percent in the second quarter.
“Residential investment is another driver of growth and could possibly post mid-teens improvement annually for over the next couple of years given favorable demographics and the dearth of new home construction in the aftermath of the housing bubble,” according to the report. “Mortgage rates at historical lows are supportive of the housing market.”
The report details concern regarding the recent slowdown in payroll growth, as nonfarm payrolls grew at an average of 150,000 per month through the first five months of the year. Payroll in May was “weak” at 38,000, following a moderate gain of 123,000 in the month prior. The wealth management team is also underwhelmed with the amount of capital spending over the course of the recovery since the financial crisis of 2008, saying the stagnation is exacerbated by the downturn in energy and a soaring dollar.
“Not surprisingly, productivity has begun to slip,” according to the report.
At most, Washington Trust expects a 25 basis point increase from the Federal Reserve this year, which is down from its previous prediction of two rate hikes, which was made before the British vote to exit the United Kingdom, known better as Brexit.
Here’s the company’s take on the financial market:
“While the economy is progressing according to the contours of our outlook, financial markets have been less cooperative. Equities have been subject to bouts of volatility, most recently as a result of the Brexit mini-panic. U.S. stocks fell over 5 percent after the U.K. referendum but have recovered nearly all of their post-Brexit losses. Despite a true correction in February 2016, the S&P 500 Index still managed to return 3.8 percent in the first half of 2016. Thus, our forecast at the start of the year for high single digits S&P gains in 2016 remains achievable.
“Our projection for the fixed-income market has, frankly, missed the mark, although we have ample company in this regard. We started the year with the expectation that the Federal Reserve would increase rates two or, at most, three times, somewhat more dovish than the consensus view of four rate hikes. Instead, the Fed has found itself constrained by developments overseas, including the recent Brexit vote and the resulting political instability in the EU and slowing growth in China. At this juncture, we expect only one rate hike in 2016, especially as we are in an election year.
“Over the past six months, we have steadily trimmed our initial estimate for the yield on the 10-year Treasury note at year end 2016 from a range of 2.5 percent to 2.75 percent to our current view of 1.75 percent to 2.0 percent. With bonds in much of the developed world saddled with negative yields and the U.S. 10-year presently at a “lofty” 1.45 percent, we may have to cut our forecast yet again. With core inflation having moved up to 1.6 percent and energy prices no longer at rock bottom, the environment is just plain miserable for investors seeking safe, real returns. For several months, we have suggested that fixed-income currently serves investors more as a diversifier in a portfolio by providing stable value, rather than a driver of absolute returns. With inflation likely to edge higher over time, we will look to add to inflation protected securities on weakness.
“The good news for investors is that lower yields, in addition to aiding interest sensitive sectors of the economy such as housing and autos, also provide support for equity valuations, which are no longer at bargain levels and hovering near historical averages. This is particularly important when profit margins may have peaked and earnings have been under pressure. While earnings growth has been elusive this year, the outlook for 2017 is hopeful, especially if energy prices hold or move higher and the U.S. dollar remains steady. Investors are also likely to continue to favor stocks with decent dividend yields in order to replace shrinking interest income.”
Finally, the wealth management division warns against the policy- and geopolitical-related risks, Brexit, a busy election, potential trade wars and disruptions from terrorism.
The entire review can be found here.

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