Tags: Quinlan | Economy | Grow | taxes

U.S. Trust's Quinlan: Economy to 'Plod Along' at 2% Growth

By    |   Thursday, 02 August 2012 10:25 AM

The U.S. economy will grow at a lackluster 2 percent rate in the second half of the year, as uncertainty about taxes and government spending hurt recovery, said Joseph Quinlan, managing director and chief market strategist at U.S. Trust, Bank of America Private Wealth Management.

The economy grew at a 2 percent rate during the first quarter and a preliminary 1.5 percent rate in the second quarter.

The unemployment rate hasn't been below 8 percent since before the recession, when the rate was about half as high.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

"We’re looking for the economy to plod along at around two percent growth rate in the second half of this year," Quinlan told Newsmax.TV in an exclusive interview.

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"Consumption is doing OK. The employment numbers are obviously very important. But the 'fiscal cliff,' that big problem looming in front of us, that could be a catalyst for less hiring and less investment among corporations very shortly," he said.

At the end of this year, the Bush-era tax cuts and other tax breaks expire, while automatic cuts to government spending kick in, a combination known as a "fiscal cliff" that could send the United States into a recession next year if left unchecked by Congress.

Amid such uncertainty, investors can expect volatility to continue, with markets up one day and down the next.

Big companies that pay steady dividends will serve investors best amid times marked by low interest rates and roiling markets.

"We’re still advising our clients to look at these large-cap companies with good, core competencies, a lot of cash on the balance sheet to put some money to work," Quinlan said.

The Federal Reserve, meanwhile, has said it will remain on standby and intervene with monetary-stimulus tools should the economy veer further off course.

Past stimulus measures have included cutting benchmark lending rates to near zero to buying bonds held by banks, a monetary-policy tool known as quantitative easing that floods the economy with liquidity to encourage investment and hiring while pushing interest rates down further.

Still, demand remains at bay as businesses fret about the future and hold off on capital spending and hiring, areas for which Fed tools offer little help.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

"The cost of capital is not the problem for most corporations, even for a lot of individual households. It’s the lack of demand. And, in some cases, like housing, it’s excess capacity. So right now we need to get the employment picture improving," said Quinlan.

"And that really comes down to corporations hiring, having the confidence in Washington and in the Federal Reserve. So there’s not much [Fed Chairman] Ben Bernanke can do when it comes to providing any more liquidity to the markets to stimulate employment. That’s got to come from demand. It’s got to come from confidence."

And confidence, meanwhile, remains weak thanks the to the European debt crisis.

"We need a better global backdrop as well because exports have been a big, huge surge in a strong story but that’s softened a little bit here because of Europe," said Quinlan.

The European debt crisis continues to rattle global markets on fears Greece will become unable to pay its debts, default and later abandon the currency zone, possibly pressuring Spain to follow suit.

Germany, Europe's paymaster, has insisted crisis-ridden southern European countries must focus on narrowing deficits and paying down debts on top of bailout assistance they have received.

Eventually, Germany might find it necessary to shoulder more debt from countries like Italy or Spain if it wants to those markets to stay in the eurozone and remain key export markets for German automobiles and other manufactured goods, Quinlan said.

Proposals to lower interest rates and ease credit conditions in Spain and Italy include having all eurozone countries back and issue one bond, known widely as a euro bond, though Germany has remained skeptical of the idea in that such a bond placement would unfairly ask its taxpayers to prop up its neighbors more than they already have and further, it would raise borrowing costs at home.

"I still think Greece, somehow, stays in the eurozone. But it’s going to take a lot more capital from Germany. It’s going to take a lot financial architect building in and around more banks, more facilities. Bigger bailouts, probably a European bond and so forth," Quinlan said.

Keeping the eurozone intact will cost money, and a lot of it — way more than the 500 billion euros ($610 billion) held in the continent's bailout fund, the European Stability Mechanism.

"I’m talking capital not at 1 trillion euros, but probably 2 trillion euros. It has to be massive if you’re talking about Italy and Spain," Quinlan said.

"The money’s there. But I don’t think the political will is. The money, certainly, can come from the [International Monetary Fund]. It can come from the ECB. It can come from the surplus countries: Germany, the Netherlands, Switzerland and so forth, the Nordic states. The money’s there, it’s the political will," Quinlan said.

European policymakers have proposed granting the European Stability Mechanism a banking license so it can borrow from the European Central Bank and assist big countries, should such a need arise.

"Italy and Spain are just too big to fail. But on the other hand, they need a lot of capital to make it all work out," Quinlan said.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

Meanwhile expect the U.S. economy to continue to attract investors despite the country's debt burdens and tepid recovery.

"U.S. capital markets are the largest, the deepest, the most liquid in the world. And this is why you see a lot of capital, whether it’s in the Middle East, China, the eurozone, come to the United States, because it’s backed by the U.S. government. It’s good paper. It’s considered safe assets," Quinlan said.

"But the key is, when you put your money in, you can get your money out."

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