Salient to Investors:

Economic growth will accelerate in the next four years as the headwinds become tailwinds.

  • Consumers are spending more and saving less after reducing household debt to the lowest since 2003.
  • Home prices are rebounding after falling more than 30 percent from their 2006 highs.
  • Banks are increasing lending after boosting equity capital by more than $300 billion since 2009.

Mark Zandi at Moody’s Analytics said the die is cast for a much stronger recovery – 2 percent in 2012 and 2013, and 4 percent in 2014 and 2015 – and financial institutions are very well capitalized and slowly lowering their lending standards. Zandi and Ray Fair at Yale said the big proviso will be shrinking the federal-budget deficit.

Eric Green at Penn Capital Mgmt said:

  • The economy will strengthen by mid-2013 as GDP surprises to the upside – 3 to 4 percent rate over the next couple of years.
  • Manufacturers, materials producers, energy and tech stocks should rise, while defensive stocks, including REITs, health- care providers and consumer staples, won’t perform as well.
  • The US should benefit in 2013 from a global rebound in the rest of the world as China is bottoming.

Allen Sinai at Decision Economics said the contracting euro area can’t be in a recession forever. Sinai expects a gradual pick up only during the next few years, rising to a just over 3 percent in 2015, held back by deficits and debt.

Mohamed El-Erian at Pimco sees 2 percent growth as the downside risks are greater than the upside risks, and the US must tackle deep-seated problems including youth and long-term unemployment and a broken housing-finance system. El-Erian said there is less leeway to use fiscal and monetary policies.

Peter Hooper at Deutsche Bank Securities said pent-up demand, more than presidential policies, will drive expansion – households are starting to buy amid rising optimism.

Easier credit terms are contributing to the rise in consumer spending. Banks reported that they continued to ease standards on auto loans and credit cards last quarter, according to a Fed survey of senior lending officers.

Dean Maki at Barclays said housing typically adds 1 to 2 percentage points in a recovery, so as distressed properties are cleared housing may give a bigger kick in 2015 and 2016.

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