Quarterly Economic Perspective – April 2014

• U.S. economic growth slowed in the fourth quarter of 2013, according to the Bureau of Economic Analysis. The 2.6% annualized increase in Q4 gross domestic product was lower than Q3’s 4.1% gain. That helped cut inflation-adjusted GDP for all of 2013 to 1.9%, compared to 2012’s 2.8%. Meanwhile, after-tax corporate profits were up 2% for the quarter–slightly less than in Q3–and a 3.7% drop in corporate taxes last year left corporate after-tax profits up 6.9% for all of 2013.
• Unemployment barely budged during Q1, remaining not far above the 6.5% unemployment rate that the Fed had targeted as a potential threshold for raising short-term interest rates. However, at its March meeting–the first under new chair Janet Yellen–the Fed’s monetary policy committee said any interest rate decision will be based on a variety of economic data, and will likely come “a considerable time” after the end of its bond purchases, now down to $55 billion a month after three rounds of tapering. Most committee members expect the Fed’s near-zero target rate to end 2015 at 1%.
• In the wake of Russia’s Crimean takeover, European Union countries and the United States agreed to prepare tough economic sanctions that could be imposed if Russia makes further moves to destabilize Ukraine. Also, the G8 nations canceled the summit that had been scheduled to be held in Sochi in June and ejected Russia from the group.
• European leaders declined to take stronger action to counteract an inflation rate so low that it raised concerns about the possibility of deflation. However, central banks in some emerging-market countries, including Brazil, India, Turkey, and South Africa, raised rates sharply to try to stem capital outflows from their currencies and/or fight inflation.
• Now you see it, now you don’t: Mt. Gox, at one time the largest Bitcoin exchange, filed for bankruptcy after 850,000 bitcoins–nearly half a billion dollars’ worth of the virtual currency–disappeared faster than Ukrainian flags over Crimean government buildings. However, Mt. Gox subsequently said it had located 200,000 bitcoins in digital wallets used before June 2011.
• Housing suffered from frigid weather throughout much of the country as housing starts and sales of both new and existing homes saw strong declines during the quarter. However, building permits issued in February–an indicator of future activity–offered shoots of hope, rising 7.7% during the month.
• U.S. manufacturing also appeared to be affected by winter weather, though by the end of the quarter, two key Fed manufacturing surveys as well as that of the Institute for Supply Management® had shown signs of rebounding. Manufacturing data from China raised bigger concerns. Indications that the country’s breakneck growth could be slowing across the board raised concerns about the potential global impact if reduced demand there affects emerging markets whose economies rely on exporting commodities to China.
• Overall inflation remained tame at both the consumer and wholesale levels. Both annual inflation rates have hovered in the neighborhood of 1% since October, giving the Federal Reserve plenty of breathing room to keep interest rates low.
• The Senate Banking Committee’s bipartisan leadership announced plans to replace Fannie Mae and Freddie Mac with a system of government-backed mortgage insurance that would be administered by a new Federal Mortgage Insurance Corp. If adopted, the legislation would require a minimum down payment for FMIC loans, create a mechanism for standardizing mortgage-backed securities based on them, and require private lenders to suffer a 10% loss before insurance payments would be triggered.

Eye on the Month Ahead

As a relentless winter finally begins to release its grip on much of the country, investors may get a clearer sense of whether sluggish Q1 economic data was primarily the result of bad weather or something more troubling. Speculation about the timing of a Fed rate hike will likely continue, along with Fed tapering. Overseas, the state of China’s economy will continue to be a focus, and the potential for tougher economic sanctions against Russia, which could affect global oil supplies, also bears watching.

Source: Broadridge