Economic Newsletter

October 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.

 

Great news, the unemployment rate fell to 5.9%, the lowest number since July of 2008. Wow, that sounds really good until you realize the employed labor force has only just caught up to where we were in 2008 with 146.6 million workers. The problem with this number is the US population grew from 301 to about 319 million people, or about 6%. Theoretically we should have been growing the number of employed persons by 6% as well, or about 9 million employees in order to keep a balance between population and labor. It will continue to be difficult to fund Social Security and other social services if the percentage of employed people versus population continues to fall.

 

Many positive signs continue to show the economy is improving here in the US. Globally, there are fewer economic numbers to cheer about. Home prices on a year-over-year basis were up almost 7% which is enabling many homeowners to rebuild the equity in their homes that was lost during the Great Recession. At one point in time roughly 30% of the homeowners with mortgages owed more than their homes were worth. That number is now approaching 10%. As a result, Consumer Confidence continues to improve. When consumers are more positive, they buy more retail goods and services, which translated to a higher Gross Domestic Product (GDP) during the second quarter this year.

 

It will be very important for the Federal Reserve Open Market Committee to be very careful as they go about considering interest rate increases in the coming months, coupled with their exit from Quantitative Easing. You may recall the Federal Reserve began purchasing mortgage-backed securities and U.S. Treasuries within a couple months of the collapse of Lehman Brothers in 2008 in an effort to get the economy back on its feet. At the time they started buying they owned about $900 billion in securities; today the number is about $4.4 trillion. At their last meeting the Fed announced it will end its Quantitative Easing bond buying program at the end of October. More importantly, they have made it fairly clear it is their intent to let these securities pay down as they mature as opposed to flooding them onto the market and hurting economic growth. That also goes a long way toward sustaining prices in the residential real estate markets by keeping mortgage rates relatively low.

 

The other important announcement that came from the FOMC was that short- term interest rates (the Fed Funds rate) will likely be increasing late next year. The consensus from the 16 members is they are looking for the Fed Funds rate to be at 1.375% at the end of 2015, then 2.875% at the end of 2016, and in the mid to upper 3% range at the end of 2017. To be clear here, these are not cast in stone and are subject to economic conditions continuing on their present trajectory. Should the economy begin to falter, even a little, these rate projections will be pushed further into the future. Presently the FOMC is forecasting GDP growth for the next 3 years to be between 2.3 and 3.0% and they are assuming core consumer price inflation will be in the 2.0% range. If either of these two deviates from the FOMC’s expectation, the Fed Funds forecast will be different.


Dennis A. Long

President & Chief Executive Officer

Pacific Financial Corporation


 

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