Economic Newsletter

March 2014

 

Welcome to the 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 US core rate of inflation has consistently been below 1.8% since the first quarter of 2013. Core inflation in January was 1.62% after being at 1.72% for the prior two months. The Federal Open Market Committee (FOMC), under normal economic circumstances, would prefer to have inflation hover around 2.0% or less, but during these difficult times of high unemployment, will accept levels up to 2.5%. The new Fed Chair, Janet Yellen, has clearly indicated it will be business as usual for the FOMC relative to monetary policy; hence, interest rates will remain low for 2014.

 

Ms. Yellen has indicated the Federal Reserve plans to continue to taper their purchases of government securities by approximately $10 billion per month until they discontinue purchasing altogether later this year. The Federal Funds rate (which has been near zero for several years) will likely remain near the zero range until sometime in 2015, when the unemployment rate is expected to be less than 6%. All this matches up with the previous plan of former FOMC Chair, Ben Bernanke.

 

Yellen happens to be a fan of the John Taylor rule and, without going through its complex details, the rule suggests that the Federal Funds rate should be in the neighborhood of 2.75 to 3.00% (once employment gets under 6%). Therefore, assuming the economy begins to normalize in 2015, the prime lending rate will likely move to 5.75% to 6%, and savings rates will begin to move up, as will residential and personal loan rates.

 

Employment numbers for February were again just ‘okay’. Non-farm private payrolls increased by 162,000 jobs, which is not bad, except the hours worked fell from 34.5 hours per week to 34.2 hours. The unemployment rate increased from 6.6 to 6.7% in February but is not a concern at this point.

 

Some interesting facts to ponder relative to future employment are that the percentage of baby boomers in the U.S. workforce declined from 48% in 2000 to 43% in 2010, and are expected to fall to 20% over the next 6 years. Meanwhile, during the same time intervals, Gen X (born between 1966 & 1976) declined from 23% to 22% between 2000 and 2010, and are expected to be at 23% of the workforce in 2020. Gen Y (1977 to 1994) went from 16% in 2000 to 35% in 2010 and is expected to be at 44% by 2020. This is one key reason why so much research is devoted to Gen Y and the hope they will replace the ‘boomer’ spending habits.

 

Housing has slowed a little over the past two months, likely a result of the severe weather in the East and Central US, coupled with a slight increase in residential mortgage rates. Here in the Northwest, home sales activity has been more favorable.

 


Dennis A. Long

President & Chief Executive Officer

Pacific Financial Corporation



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