Chief Executive Officer Newsletter
May 2013
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 I began writing this month’s newsletter, the Dow Industrials ended the day at 15,105…its highest ever! Last Friday we heard the unemployment rate had declined to 7.5%, and the week prior to that we received the preliminary report on first quarter Gross Domestic Product (GDP) at +2.5%. Sounds like we may well be into an economic recovery. People have begun to realize that the sequester to curb government spending is not going to hurt as much as some had anticipated. It will likely lower future GDP to some degree, but many are suggesting it may be less than ½ of a percentage point…certainly not enough to stall the recovery.
Housing is genuinely getting back to more normal levels. Housing starts and building permits are near 1 million annualized units. Pre-owned home inventories are near the levels we had 10 years ago. Another important housing statistic (which still has a way to go yet before we can feel good about the number), is the year-over-year improvement in the percentage of home mortgage loans greater than the value of the home. Last year about 30 percent of home mortgages were strapped with negative equity. Today that is less than 18 percent. Let’s hope the improving pace for these unfortunate homeowners accelerates over the next several months.
While the unemployment rate has been steadily improving, we still have several months to go before we get the number of employed back to where it was 63 months ago. Based upon recent non-farm payroll expansion, coupled with the decline in first-time jobless claims, it looks like we will need another 15 to 20 months (for a total of almost 7 years) to get back to the level of employment we had in 2009, before the recession began. (The longest ever recovery period was 47 months following the 2001 recession.)
The core rate of inflation remains very low and is, in fact, substantially below the Federal Reserve’s target of 2.5 percent. The Federal Reserve’s present policy to continue with “Quantitative Easing” has not changed. They continue to purchase roughly $85 billion in government securities per month in an effort to keep interest rates low and stimulate the economy. Meanwhile concerns are growing relative to the increased size of the Fed’s balance sheet. Presently it is near $3 trillion, justifiably causing many people to worry about what will happen when the buying is discontinued. Some worry about potential inflation, while others worry about the potential negative impact upon the stock market. No one can say for sure, since these are uncharted waters. What I believe we can say is, if they do back off on purchasing longer-term securities, it will be a clear signal the economy is growing at a sustainable pace on its own. Generally a growing economy is a plus for the stock market, which, in theory, should render the gradual unwinding of “QE” as relatively harmless.
Meanwhile, do not expect any material change in interest rates for the remainder of 2013, and probably through 2014 as well.
Dennis A. Long
Chief Executive Officer
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