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.
As we anticipated, 1st quarter Gross Domestic Product (GDP) came in at a very weak +.2% in contrast to Q-4 of last year which came in at 2.2%. Most economists predicted the lower level of performance this past quarter, although many thought the increase would have been closer to 1.0%. The reasons for the lower performance were the West Coast dock strike coupled with the severe winter slowdowns in the East. There will be a couple of revisions to this initial number and most likely those revisions will turn Q-1 GDP performance into a negative number. Regardless, 2nd quarter performance should show improvement since both the dock strike and weather conditions are in the past.
Both the Institute for Supply Management Indexes are doing well, with the Service Index at 57.8 and Manufacturing Index at 51.5 last month. Anything above 50 suggests economic expansion and therefore supports the likelihood of an improved Q-2 GDP performance.
On the labor front, unemployment improved to 5.4% in April, which is coming very close to where the Federal Open Market Committee (FOMC) would like to see it. As you may recall, they have a dual mandate: (1) maximize employment and (2) maintain price stability. To further support the notion for improved labor performance, non-farm payrolls jumped back in April to 223,000 from 85,000 in March. The four-week rolling average for first-time jobless claims was also favorable at 279,000 claims, which is as good as it has been in nearly 15 years.
Housing is also doing okay. According to the Case-Shiller Index, year-over-year values improved by 5.0% nationally. Thus far metropolitan markets have outperformed rural market results. New home sales are still lower than traditional volumes, while existing home sales are closer to historic levels. Home interest rates remain very low, allowing people to take advantage of both the refinance market as well as a relatively low payment structure for purchased houses.
Consumer Sentiment remains favorable, although spending for retail goods and services has not rebounded as strongly as many had thought, given the savings from cheaper gasoline prices. In fact, consumers are saving more by paying off debt and adding to their retirement funds. In the long run this is positive; however, it does hold back growth of GDP, since consumer spending makes up 2/3 of GDP.
The question of the day remains, “When will the FOMC raise interest rates?” As mentioned earlier, one of their mandates (employment) has almost been accomplished. Inflation, on the other hand, has not kicked up as most had expected. Year-over-year core inflation is about 1.3%, whereas the FOMC would like it to be closer to 2.0%. Regardless, many believe inflation is just around the corner and therefore short-term interest rates will probably be increased in September of this year. Don’t expect much of an increase, but do expect some upward movement in rates.
This month will be my last Economic Newsletter as I will be retiring from Bank of the Pacific at the end of May. Over the years, I hope you have found this little monthly economic brief useful. My thanks to many of you who have offered good suggestions to me along the way. Remember, it is the economists that make astrologers look good.
Dennis A. Long
President & Chief Executive Officer
Pacific Financial Corporation
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