The Fed Seems Ready To Do Something In September

On September 6th, 2012, posted in: Economic News, Newsletter by


The Federal Reserve seems ready to do something about the economy. In recently released minutes from the 7/31-8/1 meeting and a letter from Chairman Bernanke to Congressman Darrell Issa (R-CA), the Fed argued its actions had helped the economy already and that the Fed was ready to do more.

The most recent unemployment figures show 386,000 workers dropped out of the US workforce. This is 63.5% of the workforce, the lowest percentage since 1981. Mean while the economy only added 91,000 non farm payroll jobs (expectations were 125,000). This set the unemployment rate at 8.1% down from 8.3% thru July, a bogus representation at best.

The next meeting for the Fed is September 13th.  Economists fully expect the Fed to change the language of its policy statement and extend its commitment to hold down short-term rates. The current policy is to hold ultra-low rates until late-2014. But this was issued in January 2012, when the Fed thought the unemployment would be about 7.1 – 7.2% by 2014. The Fed’s new forecast suggests the jobless rate will not drop to 7% until mid-2015. Using their own framework, it makes sense for the Fed to commit to an additional six months of near zero interest rates.

In order to expand its balance sheet, the Fed is likely to embark on a new round of large-scale asset purchases – short-hand called QE3. The Fed minutes show “many” of the Board members think it would help the economy while only “some…expressed concern” as “ several are worried.” In Fed-speak, “many” trumps “some,” but “several” should not be disregarded. The bottom line on QE3 is that it is unlikely right now. The Fed has already extended Operation Twist (buying more long-term Treasury bonds) through the end of 2012 and there is still a pushback against more asset purchases.

Nonetheless, “many” thought more accommodation would be needed unless new data showed a “substantial and sustainable strengthening” in economic growth. And even though data after the meeting showed a rebound in July (payrolls up 163K, retail sales up 0.8%, and industrial production up 0.5%) none of the data guarantees continued acceleration.

It should be considered positive, the Fed’s  commitment to low rates – is reversible at any time. It may hold the entire yield curve artificially low, but this will end when the economy begins to accelerate and the market realizes interest rates must, and will, go higher.

The Federal Reserve has never, in all its history, actively interfered with the economic process as much as it has in recent years. Even so, the economy is still growing at an anemic, plow-horse-like 2% real growth rate, with 8.3% unemployment. Fed interference can actually hurt growth, but their fiscal policy mistakes  (specifically too much spending and regulatory uncertainty), that are holding the economy back. No one can seriously suggest there is too little money in the US economy. For slow growth, the Fed has assumed more money is needed. The US economy already has enough money to grow. What it really needs is more freedom.

The economy seems to be stuck in a familiar rut, reminding us of that famous quote by noted economic commentator, Yogi Berra, it is “déjà vu, all over again!”  Where have we seen (1) high unemployment, (2) slow growth, (3) static incomes and (4) low consumer confidence.  Most recent economic data has shown the continued trend.

  • Although real GDP was revised up to 1.7% in Q2 from a report from last month showing 1.5%. This came from an upward revision in net exports.
  • Personal consumption was also revised up growing about +0.3% in July. This is not encouraging consumers to spend aggressively.  The savings rate (4.2%) remained relatively high.  Individuals appear to be just as concerned about what’s going to happen between now and the election as business.
  • Consumer confidence dropped in August according to the Conference Board’s index.  Higher gas prices and continuing high unemployment numbers seemed to worry consumers.
  • The largest downward revision was for inventories leaving more room for extra output in the future to fill shelves and showrooms.
  • Commercial construction was also revised down.

The GDP price index was unrevised at a 1.6% annual rate of change. Nominal GDP growth – real GDP plus inflation – was revised up to a 3.3% annual rate from a prior estimate of 3.1% showing inflation is starting to creep into the economic data and is up 4% from a year ago. This almost exactly matches the 4.1% gain from the prior year. Given this trend, there is no reason for further Fed easing.

Government continues to be a drag on GDP, which actually means the private sector numbers are stronger. Real final sales in the private sector (GDP excluding inventories and government) increased at a respectable 2.6% annual rate. This growth was supported by a large upward revision to net exports, suggesting weakness abroad is not yet hurting the US.

The one negative in the recent report showed business investment in equipment and software was revised down to a 4.7% annual growth rate from a prior estimate of 7.2%. That’s the slowest growth in this part of GDP since late 2009. It looks like some firms are postponing investment until after the election.

It was good that corporate profits increased at a 2.2% annual rate in Q2 and are up 6.1% from a year ago. The gain in profits in Q2 was led by domestic non-financial firms.

The Richmond Fed index, a survey of mid-Atlantic manufacturers, got less negative in August, rising to -9 from -17 in July. Also the Case-Shiller index, a measure of home prices in the 20 largest metro areas, showed a 0.9% gain (seasonally-adjusted) in home prices in June. Prices were up in 18 of 20 areas and were up in all 20 in the past three months, led by Phoenix and San Francisco. Case-Shiller now shows prices up 0.5% versus a year ago.

Existing home sales rose 2.3% in July to an annual rate of 4.47 million units, coming in slightly below the consensus expected 4.51 million. Sales are up 10.4% versus a year ago. Sales in July were up in the Northeast, South and Midwest, but unchanged in the West. The rise in sales was due to increases in both single-family and multi-family home sales.The nation’s unemployment/jobs report for August will be released the first week of September. Don’t expect the numbers to be much  different than the past couple of months. 



Businesses are wary of hiring in the face of the upcoming election, the so-called “fiscal cliff” at the beginning of the New Year is still there and the Eurozone is preparing for Greece’s departure.


The markets took a significant step forward on the strength of the European Bank announcing it would buy debt from several European countries to lower interest rates. Until then, the US market treaded water, hoping the Fed conference in Jackson Hole, Wyoming, on would come up with something significant and positive to direct the market.  When that didn’t happen, the Dow Jones [-0.51%; +7.15%], the S & P 500 [-0.32%; +11.85%], and the NASDAQ Composite [-0.09%; +17.73%] all drifted lower. Past performance is no guarantee of future results. Indexes are not available for direct investment.

Interest rate
The Euro (€) has continued to strengthen against the U. S. dollar. It closed out August at €1 = $1.2579.  The Eurozone currency will likely reflect the impact of whether the European Central Bank (ECB) will increase their bond buying program.  If nothing major is forthcoming from Mr. Mario Draghi’s next pronouncement, Europe should remain stable. Never have the European and American markets been as intertwined as they are currently. The was always a negative correlation between them.s continued to fall marginally in both the Treasury and mortgage markets.  Yields on the Treasury’s 10-year note dipped to 1.55%. This is nearly an historic low.  Mortgage rates also declined, but don’t look for that to impact the housing sector.  For housing to move upward significantly, it will take a much more broad-based economic recovery.

Hurricane Isaac dumped a lot of rain on the South, but did not seem to impact crude oil or gas prices much. The impact was much less than predicted.

Optimism for the economy has waned in recent days by several of the doomsayers, with predictions of doom and gloom hitting the economy after the election.  Two professors from the University of Colorado announced their electoral model show a landslide election outcome for Romney in the Electoral College. They are predicting Romney gets 53% of the vote. They have been accurate every election since 1980.

Personally, I think if Rom
ney wins, there will be an explosive sigh of relief and business will start making plans for the future. Most investors are holding on to their capital reserves in anticipation of rough seas. A Romney victory would be seen as a smoothing of the uncertainty and onerous predictions of tax Armageddon touted by many commentators and reporters.HERE IS A FINANCIAL FACT FOR THE MONTHOut of over 1,500 American households surveyed in May 2012, 51% believe they are “behind” in their accumulation of retirement savings (source: Consumer Federal of America).Although 1 in every 4 homeowners (24%) who have a mortgage have debt greater than their home’s fair market value (i.e., they are “upside-down”), only 2 out of every 3 homeowners (68%) actually have a mortgage (i.e., 32% are debt-free). That means only 1 out of every 6 homeowners (including those with debt and those that are debt-free) is truly “upside-down” (source: Federal Reserve, Census Bureau).

In a recent article on the Vanguard website (, health care spending is now 25% of the federal budget. It was less than 10% in 1960.  It is likely to hit 33% in the next ten years unless programs are modified in some way.


This information is compiled by Guy Baker from an assortment of news feeds including First Trust, Yahoo Finance, Bloomburg and others. This information is intended to be informational only. This newsletter contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Investing involves risk, including the potential for loss of principal. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy.




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