US Economy

Koesterich: 3 factors behind the weak Q2 rebound

A world of sluggish growth: Pro

Falling consumer sentiment is another sign that the United States is stuck in a lackluster year yet again, BlackRock's Russ Koesterich said Friday.

Koesterich, the firm's global chief investment strategist, made his comments after the University of Michigan reported consumer sentiment fell to 90.7 in May from 95.9 the previous month. Though the reading beat the consensus estimate, it marked the lowest level of the year.

"What it comes down to is we're still in a world that's generally described by sluggish growth and modest inflation," Koesterich said on CNBC's "Squawk on the Street." "I think this is what's happening with consumer."

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Also Friday, the U.S. government said the economy contracted 0.7 percent, revising down its initial reading of 0.1 percent growth in the GDP. While first quarter headwinds including freezing weather have come and gone, some obstacles have persisted into the second quarter, Koesterich said.

"Three factors—strong dollar, more sluggish consumer, lower capex from energy—those factors are continuing into Q2, which is why the rebound is not quite as strong as some had hoped for," he said.

A stronger dollar makes U.S. goods less affordable in foreign markets and dilutes the value of earnings when American companies repatriate profits. The surging greenback has dovetailed with falling oil prices, which has caused energy companies to slash capital expenditures.

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Despite the weak second quarter bounce, Koesterich believes the Federal Reserve has enough latitude to raise interest rates in the fall. The central bank is widely expected to lift its benchmark rate from near zero in 25 basis point increments.

Investors should expect some volatility after rates rise, but it will not be "the end of the world," Koesterich said.

"Generally it's in the 5 percent magnitude. It's not a bear market. It may not even be a correction," he said. "I do believe even after the Fed lifts off, they're going to be very slow and measured, and obviously we're moving higher from historically low levels. That will mitigate the impact."