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U.S. Economic and Interest Rate Outlook - October 2012
Budget negotiations in the US and Europe are attempting to balance austerity, prosperity, and posterity. US exports and imports are showing the strains of sluggish conditions overseas. Our updated economic forecast reflects some "cliff" effects, but not a renewed recession.
Open-Ended Easing
The Federal Open Market Committee (FOMC) took a very forceful set of steps this week, designed to stimulate what officials have called a "frustrating" job market.
Our updated forecast suggests that the growth trajectory of the US economy is positive but sufficiently sub-par for the Fed to have initiated additional monetary policy support.
There are increasing signs that China's economy is slowing more than the official readings would suggest.
Central Banks Take Steps to Stimulate Economic Growth
by Asha Bangalore of Northern Trust,
Following the Feds extension of Operation Twist on June 20, 2012, the European Central Bank (ECB), Peoples Bank of China (PBoC), and the Bank of England (BoE) put in place new monetary policy support today as gloomy economic data have trickled in during recent weeks.
Patient But Vigilant Fed
by Asha Bangalore of Northern Trust,
Chairman Bernanke failed to offer broad hints about an imminent round of financial accommodation or an extension of Operation Twist (Maturity Extension Program) in his testimony on June 7. There were three key takeaways pertaining to the near term economic outlook from Bernanke's testimony and response to questions.
Labor Market Issues Hold Down Consumer Confidence Index in May
by Asha Bangalore of Northern Trust,
The Conference Boards Consumer Confidence Index slipped in May to 64.8 from 68.7 in the prior month. The sub-components of the index measuring the present situation (45.9 vs. 51.2 in April) and expectations of consumers (77.6 vs. 80.4 in April) declined in May. The Case-Shiller home price index rose 0.1% in March, after a 0.2% gain in the prior month. The back-to-back monthly increase is noteworthy because one gains of this sort were seen several ago, excluding the period when the first-time home buyer program was in place.
Sorting Out the Fiscal Cliff Issue
by Asha Bangalore of Northern Trust,
Under current law, the federal budget deficit in fiscal year 2013 will show a drastic decline from fiscal year 2012 as a result of scheduled increases in taxes and reductions in government spending. The Congressional Budget Office (CBO) estimates that the federal budget deficit of $1.17 trillion in fiscal 2012 will shrink to $612 billion in fiscal 2013. This sharp reduction of the federal budget deficit is referred to as the fiscal cliff in the financial media and macroeconomic discussions.
Kasriels Parting Thoughts Recent Federal Budgetary Trends: Facts, Not Opinions
The federal budget deficit reached its widest gap on a 12-month moving total basis in February 2010 at $1.478 trillion. Although remaining at astronomical levels, the budget deficit has been trending lower and stood at $1.246 trillion in March 2012. The year-over-year growth in the 12-month moving total of federal outlays peaked at 19.7% in July 2009. In March 2012, the year-over-year change in the 12-month moving total of federal outlays was minus 1.1%. The median growth in the year-over-year moving total of federal outlays from December 1955 through March 2012 is 6.6%.
Small Businesses Less Optimistic in March
by Asha Bangalore of Northern Trust,
The Small Business Optimism Index of the National Federation of Independent Business fell in March to 92.5 from 94.3 in the prior month. The March decline is the first after six monthly gains since September 2011. Although the percentage of respondents indicating that poor sales is problematic has held steady for two straight months, it has failed to show an improvement in March. The index tracking plans of firms to increase employment declined to zero from 4.0 in the prior month, the poorest showing since October 2008, which was during the global financial turbulence.
The Greenback Remains the Preferred Choice of Official Foreign Exchange Reserves
by Asha Bangalore of Northern Trust,
The IMFs Currency Composition of Official Foreign Exchange Reserves (COFER) database continues to indicate that dollar remains the preferred reserve currency. In Q4 2011, the dollar made up 62.1% of official reserves vs. 61.8% in Q3. The dollar accounted for 61.4% of official reserves in 2011 vs. 61.8% in 2010 and 62% in 2009. The euros share was virtually unchanged in 2011 at 26%. Is the dollars role as an official reserve currency shrinking? A small decline is visible prior to the onset of the crisis but the dollar has prevailed in the past three years.
Just as Domestic Demand Picks Up, Foreign Demand Weakens
by Asha Bangalore of Northern Trust,
The Commerce Departments first estimate of Q3:2011 real GDP growth was 2.5% annualized. Although this headline was better than the 0.8% annualized real GDP growth in the first half of 2011, underneath the headline, the news was even cheerier. Real final sales to domestic purchasers grew at an annualized rate of 3.2% in Q3:2011, the fastest growth of this measure since the 4.9% posted in Q2:2010. So, is it onward and upward for the U.S. economy going forward? Unlikely. Although things may be looking up for domestic demand, foreign demand for U.S. exports is expected to wane.
"Animal Spirits" - What Keynes Penned, Its Relevance Today
by Asha Bangalore of Northern Trust,
In Animal Spirits: How Human Psychology Drives the Economy, Why it Matters for Global Capitalism, Akerlof and Shiller explore a new avenue to understand macroeconomy and Keyness notion of animal spirits is the inspiration for their thesis. The authors of this book make an important point about animal spirits and policy making in the context of a credit crunch. In a garden variety recession, expansionary monetary and fiscal policies have the ability to revive economic activity. However, the combination of an economic recession and a credit crunch needs a special remedy.
Fed 'Twisting' Will Stimulate Economic Activity for Bond Traders
The consensus view is that after adjourning from its September 20-21 meeting the FOMC will announce a plan to lengthen the maturity structure of its securities portfolio by increasing the proportion of longer-maturity securities in the portfolio.
Jobs, Jobs, Jobs The Mantra of the Current Season
by Asha Bangalore of Northern Trust,
The unemployment rate in August 2011 stood at 9.1%. The high for the unemployment rate in the post-war period was recorded during the 1981-1982 recession when it touched 10.8% in December 1982. In this business cycle, the recovery commenced in November 1982 and by January 1985 the unemployment rate had dropped to 7.3%. This time around, the high for the unemployment rate is 10.1% (October 2009) and the recovery is 26 months old with a jobless rate, as noted earlier, of 9.1%. Consequently, the level of concern about a persistently high unemployment rate has risen significantly.
Continued Sluggish Economic Growth Expected Through 2012
by Asha Bangalore of Northern Trust,
Bernanke indicated that the FOMC would be prepared to make monetary policy more accommodative if things do not improve. He emphasized the importance of the employment situation improving. Our forecast does not call for an acceleration in real GDP growth in the second half of 2011 nor does it call for a decline in the unemployment rate. Rather, we see the unemployment inching higher. Although we do not envision a meaningful risk of a contraction in indexes of consumer prices for goods and services in the next 12 months, we do envision continued declines in house prices.
Economy Brakes Even Before Fed Takes Its Foot Off the Accelerator
Although quantitative easing might not help stimulate domestic spending on goods, services and assets, in the words of our grandmothers-it couldn't hurt. All else the same, if the Fed purchases securities in the open market, the seller of these securities can do one or a combination of three things with them - spend them, lend them or just hold them. If sales proceeds are spent or lent, then there is a net increase in spending on something in the economy. Only if the sales proceeds are just held would quantitative easing not lead to a net increase in spending in the economy.
Is There a Guide for What May Trigger QE3?
by Asha Bangalore of Northern Trust,
The 'hurdle for QE3' is high. Discussion of the current U.S economy almost always includes mention of the Feds view that justification for QE3 is more stringent than QE2. We have been mulling this thought around for a few days and here is the checklist for what may trigger QE3. First, labor market conditions need to show a consistent improvement which suggests that the turnaround is durable. The requirements pertaining to the labor market could be summed up as: back-to-back declines in the unemployment rate, strong gains in payroll employment, and a declining trend of initial jobless claims.
The Fed Terminates QE, We Lower our GDP Forecast
by Asha Bangalore of Northern Trust,
We have been putting a lot of emphasis on monetary financial institution (MFI) credit as a cyclical determinant of domestic demand for goods and services. We define MFI credit as the sum of the credit extended by the Fed, the commercial banking system, loan system and the credit union system. MFI credit is credit figuratively created ?out of thin air.? There is a distinction between created credit and transfer credit. In the latter is transferred from the grantor of this credit to the recipient of credit. Transfer credit, then, is funded by the grantor by postponing some spending.
Standard & Poor?s Downgrade Outlook on US Sovereign Debt ? Initial Reflections
by Asha Bangalore of Northern Trust,
S&Ps changed in its outlook on US debt to negative but reaffirmed the AAA rating of the nation's debt. Todays market response to this action includes equity prices viewing this in negative light. The markets response is not entirely consistent with a downgrading of sovereign debt because the decline in rating implies that the financial situation of the federal government is less secure and there are doubts creeping in about the federal governments ability to meet its debt obligations. If this was the case, the dollar should have declined and Treasury security yields should have risen.
Why the Doves of the FOMC Have an Advantage at the April FOMC Meeting
by Asha Bangalore of Northern Trust,
There are differences of opinion among members of the FOMC that have emerged in speeches of several Fed officials in recent weeks. A line is being drawn between those who favor the Fed's current accommodative monetary policy and those who are supportive of policy actions to curb demand and contain future inflationary pressures. Based on evidence present here, the doves appear to have a strong advantage at the April 26-27 FOMC meeting to stay the course and complete the $600 billion asset purchase and watch the evolution of economic conditions.
To QE or Not to QE? That is the Question
Historically, % changes in MFI credit "explain" a large proportion changes in nominal GDP. Commercial bank credit accounts for the largest component of private MFI credit. Since the FOMC commenced its second round of easing in early November 2010, the increase in Federal Reserve and commercial bank credit has been dominated by the increases in Federal Reserve credit. If the FOMC terminates its easing policy in June and private MFI credit creation does not pick up, total MFI credit growth will slow. All else the same, this would augur poorly for nominal GDP growth in the second half of 2011.
Key Market Trends between QE1 and QE2
by Asha Bangalore of Northern Trust,
QE1 provided support to the U.S. economy and revived economic activity. In the months before QE2 was put in place, a turnaround of the U.S. economy from a severe recession was a vote of confidence which lifted equity prices. If economic reports in the months ahead plant seeds of doubt about the durability of economic growth, equity prices are most likely to post declines and a drop in interest rates is possible, irrespective of whether QE2 has expired.
Fisher Could Dissent if Oil Prices Maintain Upward Trend
by Asha Bangalore of Northern Trust,
Dallas Fed President Fisher indicated yesterday that he would vote to scale back/discontinue the Fed's Treasury securities buying program of $600 billion at the March 15 FOMC meeting. Last week, Chairman Bernanke indicated that only under conditions of sustained growth, expanding payrolls, and inflation readings that are consistent with price stability would the Fed consider terminating the program. Economic data indicate that the Fed is not close to meeting these. In his opinion, the Fed's job "is done" and continued purchases of Treasuries may result in raising inflation expectations
Equity Markets and Oil Prices
by Asha Bangalore of Northern Trust,
The turmoil in the Middle East and North Africa has led to higher oil prices. Brent crude oil was trading at $116.99 ($113.07 on 3/1/2011) as of this writing and West Texas Crude was quoted at $101.68 ($99.63 on 3/1/2011). The Libyan crisis has raised oil prices significantly in the last three trading days. The crisis in the region commenced the day after a Tunisian man set fire to himself on January 21, 2011.
Changing Perception of the Economy - Food for Thought
by Asha Bangalore of Northern Trust,
The bond market essentially signals the U.S. economy is turning around and is most likely to establish sustained growth in 2011. A part of the bullish sentiment commenced after Bernanke's speech in the last week of August 2010 when the Fed signaled that a second round of support was on its way. Inflation expectations have moved up (see Chart 3) from lows in the summer of 2010. But, they are yet to surpass the levels seen prior to the onset of the crisis. Actual inflation measures also do not represent a threat.
January Employment Report ? Pace of Job Growth Inadequate for Fed to Change Current Stance
by Asha Bangalore of Northern Trust,
The number of jobs created since the recovery commenced in June 2009 is troubling and raises the level of concern for policymakers. The level of employment, irrespective of how it is measured, is still significantly below the prior peak even after 19 months of economic growth. Job creation is proceeding in the desirable direction but at a tepid pace such that it is does not offer sufficient justification for the Fed to end the $600 billion purchase of Treasury securities (also known as QE2) before the planned expiration date of June 2011.
U.S. Real GDP vs. Potential GDP ? Time to Assess this Yardstick
by Asha Bangalore of Northern Trust,
The U.S. economy has registered six quarters of economic growth, inclusive of the projected increase in real GDP during the fourth quarter of 2010. There is enormous room for growth before inflation becomes a concern. The recovery phase ended in 2010 and expansionary phase of the current business cycle should commence in 2011. Cognizant of this information, markets will evaluate the performance of the economy in a different light going forward.
Deciphering Debt
2011 is likely to raise more issues about debt, with periodic market panics about debt sustainability and bailouts. We offer this primer on the issue of debt ? specifically the various measures and the roles they play in determining a country?s risk of facing some form of debt-related crisis. Metrics to assess indebtedness of nations are classified as solvency and liquidity measures. Each are discussed, as is the special topic of the banking sector and its relation to public debt. We give our view of global public-debt-related challenges in 2011.
Treasury Market's Perception of Recovery Path is Strongly Bullish, But Mind the Hurdles
by Asha Bangalore of Northern Trust,
The 10-year Treasury note yield has climbed from a recent low of 2.41% (October 6-8, 2010) to 3.27% as of this writing. The 86 bps increase in yield in a short span reflects the market's assessment of likely improvements in economic conditions during the months ahead and the impact of a projected increase in supply of Treasury debt as a result of the compromise tax deal President Obama announced yesterday.
Commodity Prices: What is Likely Impact in the United States?
by Asha Bangalore of Northern Trust,
The S&P GSCI commodity index has moved up 11.3% from a year ago on November 19, 2010 (see Chart 1). The trade weighted dollar declined 1.2% from a year ago as of November 12, 2010. The immediate inference is that the extent of gains in the commodity price index is larger than the decline of the dollar. By implication, commodity price gains reflect more than the depreciation of the greenback.
Is Inflation Lurking Around the Corner?
by Asha Bangalore of Northern Trust,
An inflationary threat is not lurking and nor are the current readings of inflation at levels the Fed needs to fret about in the near term. The Fed has traditional tools (raise reserve requirements, raise the federal funds rate or undertake open market sales of securities) and a new instrument, raising the rate paid on excess reserves. The probability of delayed action to address rising prices is small and will occur only if unemployment continues at an unacceptably high level. Inflation hawks cannot support their contention that QE2 is tinder for future inflation.
A Refresher Before Fed's Announcement of Second Round of Quantitative Easing
by Asha Bangalore of Northern Trust,
The Federal Reserve is widely expected to announce the second round of quantitative easing after the Federal Open Market Committee meeting on November 4. The goal of QE2 will be to bring about an increase in real GDP above the tepid 2.0 percent pace reported for the third quarter, as well as bring down the 9.6 percent unemployment rate. The reputation of the Bernanke Fed largely rests on the success of this new policy. Northern Trust present charts of Treasury bond yields since 2007, with markers for major monetary policy events.
Employment is Main Focus of Fed Policy
by Asha Bangalore of Northern Trust,
The Fed is widely expected to announce the details of the second round of quantitative easing following its two-day meeting ending November 3. Advocates of QE2 expect lower interest rates to lift all interest-sensitive expenditures, including home purchases, mortgage refinances and business expenditures. In addition, bankers could be more likely to lend given paltry earnings from excess reserves and Treasury securities. Finally, the benefit of increased exports from a depreciation of the dollar may reflect in headline GDP.
Ten Questions: USA vs. Japan
The combination of lackluster growth and disinflation in the U.S. has led to comparisons with Japan's dire experience following the collapse of asset prices in the 1990s. A frequent question is whether Japan's 'lost decade' will play out in the United States. The Q&A included in this commentary identifies similarities and differences between the experiences of the two countries, with an emphasis on the recovery path. It appears that the U.S. is unlikely to mimic the economic path of Japan in the 1990s.
Nitty Gritty Details of the Labor Market Make Headlines
by Asha Bangalore of Northern Trust,
The elevated 9.5 percent official unemployment rate and the broader 16.5 percent jobless rate highlight the dire status of the labor market even after four quarters of economic growth. Financial markets have yet to follow closely the report on job openings, however, which contains information each month about the total number of job openings, the pace of hiring and separations in the economy. Harvard economics professor Robert Barro discusses the implications of the job openings report in a recent article for the Wall Street Journal.
'Federal Debt and the Risk of a Fiscal Crisis' - Important Takeaway
by Asha Bangalore of Northern Trust,
U.S. government debt held has reached a level not seen since World War II. There will be consequences to this elevated level of public debt. In addition to the well-known outcomes of higher interest rates and the crowding out of private investment, at the extreme, high debt levels could trigger a sovereign debt crisis similar to the recent situation in Europe. Northern Trust presents charts of federal debt as a percentage of GDP, with projections extending to 2020.
The Fed Has Not Run Out of Options, As Yet
by Asha Bangalore of Northern Trust,
The worst of the financial crisis is history, but the U.S. economy is still struggling to establish self-sustained economic growth. There is an ongoing debate among economists and policy advisors as to what is the best course -- fiscal austerity or stimulus -- to restore financial and economic tranquility. Discussions about the Fed's options in the event of further weakening of economic conditions in a deflationary environment have also surfaced.
Deflation and Credit Crunch ? Possible Themes for Chairman Bernanke?s Testimony
by Asha Bangalore of Northern Trust,
Federal Reserve chairman Ben Bernanke is scheduled for his semi-annual testimony about the economy at the Senate Banking Committee on Wednesday, July 21. The U.S. economy is in the throes of an economic recovery but the risk of deflation has entered the picture. As of now financial accommodation from the Fed has resulted in excess reserves in the banking system and is not being converted to loans. The chairman's thoughts about the severe credit contraction should be the most important topic of the testimony, in addition to deflation.
Time For a Proactive Approach to Replace Lament of 'Anti-business Stance'
by Asha Bangalore of Northern Trust,
A recent Washington Post article cites members of the Business Roundtable who claim that new financial regulations and health care legislation are creating an 'anti-business' environment. This allegation, however, is superficial. Irrespective of the political party in power, new financial regulation should have been anticipated following the global financial crisis. And health care legislation of some sort would have been part of the Congressional agenda in the near term, anyway, given projected health care costs in the medium and long term.
An Evaluation of the Threat of Near-Term Inflation
by Asha Bangalore of Northern Trust,
There is plenty of room for the economy to grow before the Fed slams the monetary policy brakes. Inflation expectations have moved down to 195 basis points as of June 11, from a high of 245 basis points at market close on April 29. Meanwhile, the money supply is barely growing. The ballooning of the Fed's balance sheet has not translated into rising inflation expectations. And final retail sales grew only 1.4 percent in the first quarter.
"Missing Elements" of Mr. Laffer's Incomplete Story
by Asha Bangalore of Northern Trust,
Supply-side economist Arthur Laffer recounts his experience with the Reagan administration to illustrate his arguments about the positive impact of tax cuts on economic growth with in a piece for the June 7 Wall Street Journal. Laffer predicts dire economic consequences if the Bush tax cuts are allowed to expire at the close of 2010. If Laffer's thesis is correct, however, then why, for example, did the economy post noticeable growth after the tax increases of 1993? And why did the U.S. economy undergo such a weak period of economic expansion following the Bush tax cuts of 2001 and 2003?
Greece, Portugal and Spain Are the Least of Our Economic/Financial Challenges
The debt problems that Greece, Portugal and Spain are currently facing have undoubtedly had a negative effect on global financial markets, and will probably have some negative effect on global economic activity. Problems with these countries, however, will not derail the global economic recovery that is currently underway. The biggest threat to the continuation of the global economic recovery would be some policy mistake by the Chinese economic policymakers resulting in a rapid deflation of the Chinese real estate bubble, which, in turn, would reduce Chinese real GDP growth.
Financial Regulation - The New Landscape
by Asha Bangalore of Northern Trust,
The Senate passed a new financial reform bill on May 20, while the House passed its own version in December. The next step is a reconciliation of the two bills, which should be ready for the president's signature by July 4th. The bills contain elements that will affect consumer protection, systemic risk, ?too big to fail,? derivatives, bank regulation, the Federal Reserve, credit rating agencies and securitization, and represent the biggest overhaul of financial regulation since the 1930s.
'Tis a Short-Term Panacea, More Challenges in Store
by Asha Bangalore of Northern Trust,
The colossal rescue package from Europe consists of coordinated contributions from euro area governments, the IMF, and an EU emergency fund, amounting to a sum total of ?750 billion ($955 billion). World markets have responded positively, and have moved to calmer waters compared to recent turbulent market sessions. It is only a short-term respite, however; markets are bound to get jumpy again. The industrialized world is awash with public debt at levels never before seen in peacetime.
Gold Prices ? Just the Facts (and other notes)
by Asha Bangalore of Northern Trust,
The gold bug is alive and kicking. The current gold price of $1169.50 is more than three times the long-term average of $320.10. Uncertain economic conditions and sovereign debt issues have modified the place of gold in portfolios. Self-sustaining economic growth in one or more of the G-7 nations is necessary to reverse the course of gold because the low interest rate environment yields poor returns on interest-bearing assets. Northern Trust also comments on gains in the housing market due to the impending expiration of the homebuyer tax credit.
Federal Deficit Reduction - Growth Helps at the Margin
The Congressional Budget Office tell us that we cannot grow our way out of the long-term federal budget deficit. The acceleration in real and nominal economic growth the U.S. economy has experienced in the past two quarters, however, is helping to reduce the deficit in the short-term. When growth picks up, corporate profits and household income do too. Thus, tax revenues pick up, or at least do not contract as much, while expenditures such as unemployment insurance benefits and food stamps slow down, not to mention government capital injections into teetering financial institutions.
Results 101–150
of 169 found.
