The following release was prepared by Krishnakumar Bakthisaran and Royce Walton on behalf of the 2015 Henry Fund research team. The team updates its economic outlook several times throughout each semester. This analysis forms the basis for class discussions, company selection, and investment research.
The Henry Fund Research Team’s April outlook for the US economy is reflective of the current economic deceleration with a projected 6 month growth of 2.7% down from our March consensus of 3.1%. We predict long-term real GDP growth of 2.9% by 2017, down from our earlier consensus of 3.1%. A strong dollar has made US exports more expensive for foreign customers, while plunging oil prices have reduced domestic oil investment, thereby slowing the manufacturing sector and to some extent the US economy. Our forecasts also take into account the fact that March saw the smallest additions to the domestic work force in over a year, as hiring slowed down across most sectors.
Our outlook for US employment is also stagnant as we predict unemployment to remain near the current 5.5% level over the next 6 months. Our 2 year outlook on unemployment also reflects a slight uptick in unemployment up at 5.6% partly due to more predicted losses in the energy sector.
Over the prior twelve months, the consumer price index (CPI) was unchanged with a 0.0% change, from its -0.10% reading in March in part due to a small recovery in oil prices. We expect the low inflationary environment to continue, with price changes of 0.8% over the next 6 months and to 1.7% over the next 2 years.
Henry Fund consensus estimates for interest rates remain largely unchanged when compared to our March projections. We expect the Federal Reserve to begin gradually increasing rates in August or September of 2015, but we do not anticipate a large boost to market rates in the near term. We expect the 10-year Treasury bonds will rise to a 2.35% yield by September.
Oil, currently trading just over $52, is expected to remain flat in the $50 range over the next six months. This is also unchanged from our March projections. We do not expect any major changes in supply or demand for the next six months. Concerns about a boost in supply from Iran have quelled as the International Energy Agency released statements saying that they did not expect increases Iranian production for at least three years. We expect a recovery for oil by 2017 to just over $70 based on recovering economies in Europe and Asia.
Weak job numbers and concerns regarding increasing interest rates caused us to downgrade consumer confidence expectations. We expect consumer confidence to be neutral over the next six months and through 2017, which is a downgrade from our more optimistic projections in March.
We also expect currency headwinds to continue for American companies as the dollar continues its surge relative to the euro. Exchange rates are projected at $1.06 per euro in six months due to the continue struggles in Europe. By 2017, however, we expect the a slight European recovery to increase the rate to $1.12 per euro.
Finally, global trends, rising interest rates, and slow GDP growth all filter down to our projections for the S&P 500. We expect US equities to trade relatively flat over the next six months with only a 1.0% growth through September, and we are becoming increasingly concerned about current valuation levels in the market. The team has found it difficult to identify new investment opportunities across most economic sectors given high P/E levels and sluggish near-term prospects for economic growth. However, going forward we like targeted investments in health care, information technology, regional banking, and the consumer discretionary sectors.