U.S. Economic Growth to Fall Sharply Due to Uncertain Policies

SAN FRANCISCO and LONDON, Aug. 26, 2011 /PRNewswire/ — Economic growth in the U.S. over the next 12 months is expected to decline to around 2.0 percent, significantly lower than the 3.1 percent predicted as late as June 2011, according to the proprietary macroeconomic model of Mellon Capital Management, part of BNY Mellon Asset Management.    The slower growth expectation is discussed in a recent white paper from Mellon Capital, “Impact from the Recent Turmoil: A Macroeconomic Outlook.”

The report attributes the lower growth forecast in the U.S. to the impact of the uncertainty of government policies during a soft economic patch.  The weakening economic outlook, in Mellon Capital’s view, could limit earnings growth for the companies comprising the Standard & Poor’s 500 Index to approximately 6.8 percent over the next 12 months, well below the consensus forecast of 14.1 percent. Mellon Capital also warns that deteriorating conditions in the Eurozone could pose a threat to financial markets.

“While our models are forecasting earnings well below the consensus, the situation appears to be far better than 2008, when, according to our model,  the probability for negative gross domestic product (GDP) growth rose to 30 percent before the Lehman failure,” said Jonathan Xiong, managing director and global investment strategist in Mellon Capital’s global asset allocation group.  “This time, even if U.S. GDP growth falls to zero percent, we believe the companies in the S&P 500 should post earnings gains since they derive nearly half of their earnings from outside the U.S.”

Looking at the Eurozone, Mellon Capital suggests the lack of a long-term solution to the debt problem may result in a prolonged period of uncertainty that ultimately ends with the restructuring of the debt in certain peripheral nations.

“We believe the sovereign crisis in Europe represents a much larger and more complicated structural issue than the U.S. debt downgrade or austerity plans,” said Xiong.  “While the recent actions by the European Central Bank to purchase bonds in Italy and Spain seem to have eased short-term uncertainty, we do not believe this is a long-term solution to resolving the sovereign debt issues in Europe.”