Economic Commentaries

Entries for April 2014


Real GDP growth was about 1% annually in the first quarter while inflation was about 1% as well. This is well below consensus forecasts at the start of the year and it can be attributed in part to harsh winter weather. Activity declined in January and February but as the weather normalized in March there was improvement.

The pick-up was most noteworthy in the labor market report for March which showed a steady rise in payrolls and a healthy rebound in hours worked. Also according to the ISM, production rebounded in March. But this is not to suggest that weather was the only restraint on business activity. Indeed, the March rebound merely brought activity back to the norm of the last six months with no indication of the acceleration that has been widely expected. And because GDP growth was much weaker than hours worked in the first quarter, productivity slumped. (This may be an aberration but it bears watching).

We continue to believe more fundamental constraints are in play. Mortgage demand remains weak from a combination of reduced affordability and tough loan standards. Vehicle demand, while strong in March, has been flat over the last nine months despite increased price discounting. Vehicle loans get longer and longer, indicating that sellers are reaching down the affordability ladder to find buyers. A positive is that the household saving rate is neutral. But income growth remains weak amidst stagnant wage growth; cash flows are being crimped by a collapse in mortgage refinancing; prices for necessities are rising and home price inflation is easing. Finally, there is capital investment, which was supposed to be a source of strength this year. But as yet there is no such indication as policy uncertainties prevail and business revenue growth remains elusive.

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Posted in: General

Economic activity indicators were universally weak in the December-February period. Harsh winter weather is only partially to blame in our view. So while some rebound may be expected as weather conditions normalize, underlying growth seems stuck in the same 2% mode that has characterized this recovery. Even assuming a rebound in March, the first quarter’s real GDP rate will probably be around 1.5% at best, following last year’s final quarter pace of 2.4%.

Economic growth was set to slow in our view regardless of weather. Approximately 55 tax preferences expired at year end including full expensing of capital equipment. Emergency jobless benefits expired at year end. The Affordable Care Act’s botched implementation and ill-conceived provisions have hurt job prospects and is looking increasingly expensive. And of course those affected by the 2013 personal income tax increase will soon have to pay the bill. Thus, there is more fiscal drag hitting the economy than many had envisioned without any offsetting improvement in the fundamentals of the economy.

Indeed, inventories rose unintentionally in last year’s second half and are now being worked off. Vehicle sales appear toppy in our view as pent up demand is being satiated with buyers lengthening the maturity of car loans. Housing demand has yet to revive from last summer’s interest rate spike because investor demand is waning and first time buyers are scarce because of stiffening loan requirements, worsening affordability, and mediocre job and income prospects. Business investment is failing to lift off because spending was pushed into 2013 by policy uncertainties; revenues growth remains weak, economic conditions abroad appear iffy; and financing costs have turned up when adjusted for a complete absence of inflation.

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Posted in: General