Here's What Morgan Stanley Is Watching In 2015

Morgan Stanley released its economic outlook for 2015 this week, and it’s an optimistic one.

Spending Growth

The foundation of much of the expected improvement to the economy is a stronger consumer. Morgan Stanley expects a 2.8 percent growth in real consumer spending next year, making 2015 the strongest year for the consumer since 2006.

Morgan Stanley predicts the strong capital spending that drove growth in the second half of 2014 will carry over into the first half of 2015 before cooling off in the second half of the year. Despite the risk that low oil prices will dampen energy-related capex, steady growth of U.S. commercial construction outside of the energy sector should pick up the slack, the organization said.

After a weak five-year period, business formations are now undergoing a strong rebound, growing at an annual rate of 3 percent over the first three quarters of 2014.

Morgan Stanley also notes that a shifting focus from internal capex spending to external mergers and acquisitions (M&A) will likely continue in 2015.

Housing

The picture is not all rosy, though.

Analysts believe that home ownership rates will continue to fall due to the tight mortgage credit environment. The economic silver lining to a weak housing market, however, is the potential for a ramp-up in apartment building construction in 2015.

Rental vacancy rates dropped to a 20-year low in 2014.

Fiscal Policy

Analysts also predict government spending will no longer be a drag on the U.S. economy next year. Economic growth could come as a result of new fiscal policies, particularly from potential increases in defense spending and construction of the Keystone Pipeline.

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In addition, Morgan Stanley warns of the political uncertainty surrounding the debt ceiling and the budget.

Fed Tightening

In terms of inflation, Morgan Stanley sees core PCE inflation staying near 1.5 percent for the time being. With low inflation and no wage pressures, the path is cleared for the Federal Reserve to raise interest rates.

However, analysts also predict the first rate hike will not come until January 2016, noting that they do not believe the Fed will make the same mistake it did in 1937 when it tightened fiscal policy too soon after the Great Depression.

"Solid Footing"

Finally, Morgan Stanley raised its projected GDP growth rate for 2015 from 2.5 percent to 2.7 percent.

It remains to be seen how 2015 will play, but Morgan Stanley’s position is clear: “Primary data suggests a solid footing for the U.S. economy.”