Economic Newsletter

August 2014

         

     

Welcome to the CEO's monthly economic newsletter. The newsletter provides a basic narrative overview of recently published economic indicators for your reading pleasure. You should not rely on this information when making investment decisions, but rather seek professional advice from qualified investment advisors.

         

The good news since my last letter is that the preliminary second quarter number for Gross Domestic Product (GDP) came in at 4.0%, not far off the mark from where many economists predicted it would be. The big questions are, “Will this number hold up during the next two revisions?” and moreover, “Will we see similar results in Q-3 and Q-4?”

        

We have officially been out of the recession following the credit crisis for 61 months (as of June). It is interesting to note that the average expansion length (following a recession) since World War II is just under five years (59 months) and the last three lasted an average of 90 months. While economists don’t expect a downturn anytime soon, history can be an important reminder that expansionary periods do not last forever.

  

Housing continues to do relatively okay. The Case-Shiller 20-city Home Index on a year-over-year basis was up a little over 9%. This is the first month in some time that year-over-year values have increased less than double digits and, frankly, that is probably a good sign that housing is beginning to settle down. Existing home sales are turning at a rate of just over 5 million annualized units, which is not far off their historical norm. New home sales, on the other hand, are about half their norm at 406,000 annualized unit sales. One of the reasons is that census data shows 12% fewer households under age 35 owning a home as of Q-1 this year compared to Q-1 of 2008 (36.2% vs. 41.3%). The expectation is for the differential to narrow in the coming years, which will help new home sales.

  

The employment situation continues to show signs of improvement even though the unemployment rate increased to 6.2% from 6.1% last month. For the first time in many, many months the four-week rolling average for first-time jobless claims fell to less than 300,000 applicants. At the same time, non-farm private payrolls added nearly 200,000 new jobs in July after adding 270,000 in June, (both favorable results if sustained for the remainder of the year). The job additions are what will help sustain the GDP growth rate mentioned earlier, as consumer spending represents roughly 70% of GDP. 

 

The Federal Reserve said they will end their bond buying program by October of this year, but the timing of interest rate hikes continues to be debated. Presently it looks as though the rate hikes will not occur until sometime late next year and, even then, I would not anticipate sizable changes. Frankly, our Treasury cannot afford a sizable increase in interest rates given the adverse impact it would have on the cost of our outstanding government debt load. By example a 1% increase in interest rates will add about $180 billion to deficit spending. We can handle a modest 1% to 2% increase, but more than that will require a very robust and sustainable economic growth rate to pay for it. 

 

Meanwhile, interest rates are going to remain favorable for home buyers and sellers, but not so friendly for people on fixed incomes relying on FDIC insured certificates of deposit to augment their income sources.

 


Dennis A. Long

President & Chief Executive Officer

Pacific Financial Corporation

    


 

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