Economic Predictions for 2007
Prediction 1 - Global and domestic GDP growth will remain on their current trajectory, with the U.S. economy showing some weakening because of a challenging housing market (below 3% growth) and the global economy doing better than expected (still about 3.5%) because of robust activity in Asia and other areas of the world that produce oil and raw materials.
Prediction 2 - Neither inflation or wage pressures will increase. In truth, those are two sides of the same coin. Without wages and labor costs going up, there cannot be sustained inflation in the economy, because spending and wages represent the lion's share of the U.S. economy and of corporate costs, respectively. Unless wages rise, cost increases cannot be sustained, ergo no inflation other than energy prices and food.
Prediction 3 - The weakness of the U.S. housing market will not be a contagion that significantly hurts consumer spending. Whatever contraction occurs in some parts of the country will be more than offset bby the astonishing wealth of the wealthy who will, in turn, spend considerably. That will not ease the burden for the sub-prime borrower who defaults on an ARM mortgage only a few years old, but it will lessen the impact on the economy as a whole.
Prediction 4 - Interest rates are not going up either on the short-end or the long-end. We remain confident that over the coming years, 10-year Treasuries will likely yield 3% rather than 6%, for the same reasons we think that there will be little inflation and few wage pressures. In a world where the companies we cover can increasingly go anywhere for capital and for labor, there is no shortage of either and that means there are no reasons for the cost of capital or the cost of workers to increase.
Prediction 5 - Corporate profits will remain high and margins will be surprisingly strong. Not for every company, of course, but we believe that they will for those companies of all sizes functioning in a global environment. Corporate margin expansion, however, is slowing and is unlikely to maintain the pace of recent prior years. But we believe reinvestment in growth opportunities, especially international ones, will be one of the (very good) reasons for this.
Prediction 6 - The relationship between national GDP figures and corporate profits will continue to break down. That means modest GDP will coexist with double-digit corporate profits and that the gap will remain wide.
Stock Market Prediction for 2007
"Last year, we noted that the markets were trading below their fundamentals. Even with the Dow surpassing record highs in 2006 (up nearly 20%) and even with the S&P 500 and Nasdaq having very solid returns last year, we continue to believe that that the markets are trading below their fundamentals. Barring external shocks, the markets and the economy are more dynamic than not and offer more opportunities than risks," said Messrs. Chung and Karabell.
"The U.S. equity markets have room to grow. We have said that for the past four years and have been correct. This is not bullishness for the sake of bullishness, nor is it optimism about the U.S. economy per se (there are enough issues and imbalances to keep any such optimism in check). This is a golden period for capital and for companies engaged in global business. The political backlash against that, and the inequalities (real and perceived) that come with it, are certainly concerns for the markets in the year ahead, but we doubt that politics will derail these trends anytime soon," concluded Messrs. Chung and Karabell.
Major Sector Trends for 2007
Below are perspectives on high profile industries for 2007:
Last year we noted that internet commerce was beginning to represent a more meaningful portion of overall retail sales and advertising. This year, that trend has continued. Online retailing has gone from 2.3% of total sales to 2.8% and is growing more than 25% a year. For the final quarter of 2006, total e-commerce sales are estimated to be almost $30 billion, as millions of us decided not to wait in line to do our holiday shopping and instead surfed the web at midnight with credit cards in hand. Advertising budgets continue to shift evermore toward the web and away from traditional print and broadcast media (online advertising grew even faster than online sales, at a 30% clip), with winners such as Google standing in stark contrast to "old media" stalwarts such as the Tribune Company. In a similar vein, music and video are finding a burgeoning home online, at the expense of the retailers of yesterday such as Tower Records, the neighborhood video store, and even the local movie theater.
As housing softens, spending for experiences should grow even more, at the expense of spending purely for things. Of course, some of those experiences require hardware, such as gaming consoles, flat panel TVs, and computers for home entertainment, or next generation (3G) wcell phones that transform the phone into a multimedia device. While these trends are noticeable in the United States, they are tectonic in emerging markets such as China, where one company (China Mobile) has more subscribers (around 300 million) than the entire population of the United States. The spending on next generation hardware and software to upgrade cell phone service will continue for years.
The rollout of Microsoft's Vista platform looks to trigger a new round o of hardware sales, as consumers and companies shift from the old Windows platform over the course of the next two years. Software companies will launch new versions of old products; semiconductor companies will ramp up production to meet the demand for hardware to support the massive Vista operating system; and computer manufacturers will try to use the rollout to generate demand for new laptops and desktops.
Those hoping for significant easing of energy and materials costs will be disappointed. While speculation in all aspects of these sectors will probably increase, the underlying supply-demand fundamentals do not suggest any easing of prices, although that will not preclude volatility.
One of the most dramatic and important developments of the past year aas been the change in the way securities and derivatives are traded. The fusion of Wall Street's long-term predilection to trade just about anything and technology's ability to turn just about anything into an instrument that can be priced and traded electronically has led to a massive increase in the volume and sophistication of today's trading exchanges. We expect this evolution of global exchanges to accelerate in 2007.
Health care looks to be the loser of the 2006 U.S. congressional election, but in truth the spiraling prices couldn't have lasted no matter who was at the helm in Washington. While many service companies and big pharma may feel the pinch, the industry is ripe for innovation on everything from electronic records to outpatient care. That was true in 2006 and it will be even more true in 2007.
Finally, industrial companies and consumer companies pegged to growth outside the United States will, we believe, continue to reap rewards in terms of revenue growth.
