U.S. Economy Continues to Improve 5/9/14

The U.S. economy is poised to accelerate sharply in the second quarter according to the Wall Street Journal’s May survey of economists. The consensus forecast calls for annualized GDP growth of 3.3% during the quarter, up from the 3% pace predicted in last month’s survey. The growth spurt represents a sharp rebound for the U.S. economy which nearly ground to a halt in the first quarter.  Last week, the Commerce Department reported that real GDP grew just 0.1% in the first quarter, but recently released data on construction and exports have economists thinking the U.S. economy actually contracted during the period.   Of the 449 S&P 500 companies that have released first quarter results so far, 76% exceeded earnings estimates and 53% exceeded revenue projections.

Fed Chair Janet Yellen said that treasury yields aren’t likely to increase without a more robust economic recovery. In testimony yesterday before the Senate Banking Committee, Yellen said “interest rates are unlikely to begin rising until we are in a strong economic recovery.” Yellen was responding to a question about the impact that higher treasury yields might have on the federal budget. “In thinking about what will happen with the deficit and the debt, it’s important to keep in mind that a strong economy will be very good for the federal budget deficit,” she said. “Yes, interest payments will go up, but I believe that the larger piece of it will be that a stronger economy will improve the budget.” Yellen also mentioned that the improvement in the labor market and growth should warrant a continuation of tapering.  The central bank’s portfolio of assets has swelled to $4.5 trillion from $800 billion in 2007.  Yellen said it has yet to be decided what the appropriate size of the Fed balance sheet should be, but suggested it could take up to 8 years to return to pre-crisis levels.

Dallas Fed President Richard Fisher said that he intends to vote for tapering the Fed’s bond purchases by $10 billion in each of the upcoming meetings until October, when he plans to vote for a cut of $15 billion. “Unless there is some extraordinary event that takes place I’m just telling you right now I will vote $10 billion, $10 billion, $10 billion and when we get to October, $15 billion. Done. Goodbye. Thank God. Good riddance. The program is over,” Fisher said. Fed officials routinely state that given the current pace of tapering, QE3 will end sometime later this fall. Fisher’s remarks suggest that October 30th seems to be the most likely end date for the program.                                                                    

Philadelphia Fed President Charles Plosser urged the Federal Open Market Committee (FOMC) to improve public communication on policy by clarifying the likely path of its benchmark interest rate.   “One way to enhance its communication would be to indicate the likely behavior of interest rates” based on policy rules, indicating whether the Fed will be more “restrained” or “accommodative,” said Plosser, who is a voting member of the FOMC this year. FOMC participants’ quarterly interest rate forecasts can be a source of confusion. At a March 19th press conference,  Janet Yellen cautioned against giving too much weight to the forecasts, saying the FOMC statement provides a more reliable signal of the central bank’s intent.

Fewer Americans signed applications for unemployment benefits last week in a sign that the labor market is continuing to gain traction. The Labor Department reported that initial jobless claims fell 26,000 to 319,000 in the week ending May 3rd. The number of people continuing to collect benefits dropped by 76,000 to 2.69 million in the week ending April 26th. Weekly claims data has been volatile in recent weeks as the government had difficulty adjusting the data for the Easter holiday and spring break at schools which occurs at different times from year to year. However, the Labor Department said most of that fluctuation is probably over. The drop in layoffs sets the stage for bigger gains in employment and wages in the months ahead.

Consumer confidence last week held near the second-highest level in more than six years as households remained upbeat about their finances. The Bloomberg Consumer Comfort Index eased to 37.1 for the week ending May 4th from 37.9 the prior week. The gauge has held above 37 for three straight weeks, the best performance since January 2008.  Consumers’ views of their personal financial situation remained close to a six year high, while the buying climate gauge, which asks whether it is a good time to make major purchases, posted the second-highest reading since November 2007. While consumers were upbeat about their own finances, they were less optimistic about the outlook for the economy as a whole as views on the national economy fell to a three-month low. “Consumer confidence is holding up quite well, and looks to improve in the middle portion of 2014,” said Bloomberg economist Joseph Brusuelas. As firings ease, “a sense of security in their own personal finances has crept back into American households,” he said.

Euro Zone

ECB President Mario Draghi said that the central bank is “comfortable” with taking action at their next meeting in June so long as the staff projections call for further easing. Speaking at a press conference following the central bank’s monthly policy meeting yesterday, the ECB chief expressed concern that the strong euro could depress prices and derail the eurozone’s nascent recovery. “The strengthening of the exchange rate in the context of low inflation is cause for serious concern,” he said. Mr. Draghi did not specify how the central bank might ease policy further given that its benchmark interest rate is already at a record-low .25%. However, potential easing options may include another rate cut, implementing a negative deposit rate, halting sterilization of earlier bond purchases, or implementing a quantitative easing program similar to the U.S. Fed.  The likely scenarios call for cuts in both the main refinancing rates and the deposit rates.  A negative deposit rate would essentially see the ECB charge banks for holding their money, thus encouraging the banks to lend to smaller companies that would help aid the backbone of the Euro zone economy.


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