May 2011
Posted November 21, 2011
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In this Issue:
The Economy
Though it may not feel like it, the United States has moved from economic recovery to expansion. All of the output lost during the "Great Recession" of 2008 has been fully regained and we are now at record levels of gross domestic product (GDP). While "record level" sounds nice, the underlying growth rate is currently anemic. The annualized rate of GDP growth for the quarter just ended came in at 1.8 percent, according to the Bureau of Economic Analysis (BEA). In the fourth quarter, real GDP rose at an annual rate of 3.1 percent, slightly ahead of the 2.6 percent rate in the third quarter of last year. For all of 2010, real GDP grew at a 2.9 percent rate. While this is the best showing since 2005, it is well below what would normally be expected in the cycle, given both the magnitude of the recession and the amount of stimulus thrown at the problem.
Interest Rates and Inflation
At its meeting on March 15, the Federal Reserve modestly upgraded its outlook for the economy. It said the recovery is on a firmer footing, and that overall conditions in the labor market appear to be gradually improving. Nevertheless, the Fed didn’t change its 0-0.25 percent range for the federal funds rate, a policy in place since December 2008. The Fed is also continuing its planned purchases of $600 billion in Treasury bonds, a quantitative easing program scheduled to be completed by the end of June. Though the Fed claims this policy is merely “buying bonds” in an effort to keep interest rates low in treasuries (and correspondingly, in mortgages), what they don’t discuss is where the money comes from to support such buying. Specifically, they are increasing money supply by "printing" money.
S&P Fires a Shot Across the Bow
In April, Standard & Poor’s issued a warning that America’s AAA credit could be in jeopardy because of its rising public debts. As a country, we’ve been spending roughly $1.5 trillion more than we receive in revenues, all of which needs to be financed. Few would argue this is a sustainable trend. While the current debt/GDP ratio stands at an uncomfortable, but manageable 64.8 percent, in a few years, forecasts show it ballooning to Greek-like levels. Though both parties claim to be serious about balancing the budget, the dialogue suggests they are still miles from reaching resolution. Meanwhile, we continue to spend $170 million beyond our means every hour of every day.
The Outlook
While employment is belatedly moving up, the consumer sector is still facing headwinds. Many have wages that are failing to keep up with rising expenses. Compared with a year earlier, average hourly earnings in the United States were up just 1.7 percent in February. Meanwhile, consumer prices, as measured by the Consumer Price Index (CPI), were 2.1 percent higher in that time. Furthermore, the CPI understates costs to the consumer, as we have discussed in earlier reports.
