Prudential Sees Economy Heating Up in 2014

Prudential expects the economic recovery to gain momentum in 2014. Interest rates should remain low due to low inflation and relatively high unemployment.

New York—Prudential expects the economic recovery in the U.S. to gain momentum in 2014.

Edward Keon, Jr., managing director and portfolio manager, Quantitative Management Associates, thinks that the U.S. economy will experience some acceleration this year. He forecasts that the annualized GDP growth rate will be 4.1 percent for the fourth quarter of 2013, and possibly even reach 5 percent in the second half of the year. 2014 will witness sustainable GDP growth increasing to over 3 percent, he says.

Keon and other officials from Prudential shared insights recently at the company’s 2014 Global Economic and Retirement Market Outlook held in New York.

“The ‘new normal’ will resemble the ‘old normal,'” says Keon, who in June had predicted the acceleration in the economy in the last quarter of 2013. “We are now experiencing a robust economy that we used to think as normal.”

Although domestic government cutbacks in spending had been a drag on the economy, “tremendous” pent-up consumer demand in industries, “slightly” improved credit conditions, and a “significant boost” in the energy sector all bode well for the economy, Keon says.

Michael Lillard, chief investment officer for Prudential Fixed Income, says there are no signs of inflation, which remains relatively low in part because of the slack that exists in the labor market.

Lillard predicts that interest rates will remain low through 2015, because of the low inflation and relatively high unemployment rate.

“With the 10-year treasury rate skirting three percent, we think the market has already priced in the Fed’s taper and that rates should hover around current levels unless economic growth surprises to the upside, or the Fed moves more aggressively than expected to end it bond purchases,” Lillard says. He added rates could trend even lower “if the economic backdrop disappoints and inflation remains below the Fed’s target.”

Lillard says that he expects spreads on triple-A rated CMBS to continue to narrow. These commercial property-backed bond securities are currently very attractive to investors on a risk-adjusted basis compared with investment-grade corporate bonds.

Sharp increases in commercial property valuations, especially in the multifamily sector, have led to questions of possible real estate bubbles. In a question-and-answer period, David Durning, president and CEO of Prudential Mortgage Capital Co., indicated that property prices may not be overvalued overall as they remain below replacement costs.