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Economic and Market Review schieffer

By: Mark Schieffer, CFA
EVP Chief Investment Officer

How did you feel in 2008, just before the financial market crisis exploded onto the scene in September of that year? At that time, the U.S. economy was already headed toward a downturn, with the housing and financial sectors faltering due to the excesses of the prior 2 years. Well, most key economic indicators are now back to those 2008 levels, after getting crushed in 2009. We’ve experienced a slow, almost imperceptible rise in economic activity here in the U.S during the last 2 years. We’ve got no real reason to celebrate, but conditions could certainly be worse.

U.S. consumers resumed spending in the 4th quarter. Retail sales (ex-autos, gas) rose solidly in October and November figures are expected to be similarly rosy. Yes, we’re pulling from savings in order to spend, but confidence in the future appears to be stronger. It’s quite possible that growth in the 4th quarter could have a 3% handle. U.S. stock prices are up 5-6% since Thanksgiving, helping to fuel increased confidence in the economy. This happened despite (or perhaps because of?) the failure of a key bipartisan congressional committee to figure out a way to slash the budget deficit.

The November employment report wasn’t horrible, with 140,000 new private jobs created, essentially on trend for the last six months. The unemployment rate fell below 9% (8.6%), though more people appear to be opting out of the job market. Auto sales continue to lead the way toward a stronger manufacturing sector. November auto sales were at a 13.6 million annual unit rate, up 48% from Q3 2009. The housing market remains weak, but consistent. Home prices are generally flat since the ’08 crisis, though down slightly since 2010. Mortgage delinquencies are back down to 2008 levels and existing home sales continue to tread along at a five million annualized sales rate. New home sales remain depressed, leading to a black hole of construction activity. This is a significant reason the economy hasn’t rebounded like it typically does after a recession. We won’t experience high growth rates without increases in construction activity.

U.S. interest rates remain range-bound (1-2% 5-10yrs), with increasing inflation pressures (CPI creeping above 2%, PPI creeping toward 3%) being offset by weakness in the Euro currency, the latter leading to U.S. Treasury purchases by global money managers.

Given that the Fed pronounced this summer they would not raise rates before mid-2013, we may be in line for higher longer term rates if the economy and inflation continue to grind higher. This scenario would be marginally helpful for financial institutions, as earnings from spread income may improve.

The bottom line here is that the domestic economy is healing, with or without government support measures. We’ve still got 3-4 years to go on the current trend line before training wheels can be removed. Wild cards that could shift the trend line will be the 2012 election cycle and any radical government approach to attempt to revive the moribund housing sector.

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