On the economy
After 4 Quarters of negative growth we got a 3rd Quarter GDP figure that posted positive…and it beat the estimates. The Bloomberg survey expected GDP to increase at a 3.2% rate on a quarter-over-quarter basis and the actual number was 3.5%. Treasury prices are retreating on the news, pushing yields a bit higher across the length of the curve but so far this is a very measured pullback. The 10-year Treasury is trading at a 3.46%...about 10 basis points below the high water mark that it hit earlier this week. The number is being treated with a healthy (and well deserved) amount of caution rather than as a sign that this economy is off to the races.
While positive GDP is always a welcome sight, this number hardly means we are back on the road to prosperity. After our economic engine sputtered and then stalled, the government pulled out their stimulus jumper cables in an attempt to force a restart. Government spending is largely responsible for the increase in the 3Q GDP number. We saw the cash-for-clunkers program and the new-home-buyers credit among other things that subsidized activity into happening. The question now centers on whether this recovery is sustainable without more government spending…can they put the jumper cables away and let us get this thing back on the road under its own power? Based on the numbers I’m seeing I would guess that it is nowhere close to sustainable at this point.
I would suspect that they know it too. Congress just extended the first-time-home-buyer program…not a sign that the recovery is off and running under its own power. Those that are forecasting a double-dip recession are going to be on the edge of their seats over the next few months as this GDP number provides a real cliff-hanger moment for them. If we can generate positive GDP numbers that aren’t propped up by government spending and we see the number of initial jobless claims fall off dramatically then I will get excited about seeing a real “honest-to-goodness-consumers-in-the-streets-with-fist-fulls-of-cash” recovery…I don’t think anybody is putting the jumper cables away until that starts to materialize.
In the mean-time you still have highly leveraged consumers who are very concerned about keeping their jobs and homes. I wrote about the behavioral effects of this psychology last week. Fear changes behavior. It would seem at this point that personal savings rates should at least continue at their current levels and likely increase. This is a necessary and positive thing but the flip side is that a dollar saved is a dollar that is not spent.
On jobs
There are still close to 6 million people on the “official” unemployment rolls. This doesn’t count the impact of workers who have run out of benefits and are no longer on the rolls, who have become discouraged and quit looking for work, full time workers who have been forced to work part time, or workers that were forced to take pay cuts to keep their jobs. 3.5% GDP growth isn’t enough activity to put this number of people back to work anytime soon.
One factor that will muddy the waters on the jobs front in any recovery is that there are many workers who have been forced from full-time position to part-time positions. This situation will likely be reversed before any new hiring is done. As the economy begins to recover businesses will ramp up production using what is basically idle “human capacity”…bringing part-time workers back to full time status. There is no need to hire new people until you have enough work for the guys that were forced into part-time status. This is but one factor that will slow our return to “full employment” when the economy begins to recover. Again this points to the need for something much more robust than a 3.5% growth rate for us to return to full employment.
To provide some perspective it helps to note that many firms are forecasting that we won’t return to “full employment” until sometime in 2013.
On The Fed
Today is officially the last day of the Feds $300 billion Treasury repurchase program. This program has been one leg of their effort to keep rates artificially low to help stimulate the economy. The idea here was that if you force Treasury yields lower you will lower loan rates, making credit more accessible to borrowers. This was done in conjunction with the $1.25 trillion MBS and Agency purchase program which aimed to crush mortgage spreads…which it did. The combination of the two programs was aimed at reducing mortgage rates. Lower mortgage rates would help stimulate the housing market and the broader economy in general. The thoughts at the start were that this would support housing prices by making loans more affordable to new buyers, enable people to refi into lower cost mortgages (and have extra spending money due to the lower monthly payment), and also allow some borrowers in exotic and unaffordable ARM structures to refinance into a traditional mortgage (which would in theory help stem some of the foreclosures).
Writing on the effectiveness of this program would be beyond the scope of today’s letter. The main point to take away from this today is that that the $300 billion purchase program just ended...on-time no less. The Fed has been a big player in the Treasury market and tomorrow they will not be there with a fat wallet and a desire to manipulate yield levels. This is a good development. The immediate thought it that yields could begin to drift higher in their absence. Time will tell. Offsetting this to some extent is that there has been no shortage of new money chasing Treasuries at this weeks auctions. The auctions have gone well so far and we’ll see what type of demand there is today for the 7-year auction. If the market decides it doesn’t like the longer dated Treasuries today and the Fed isn’t there to pick them up we could see a decent steepening of the yield curve as the long end of the curve begins to rise.
On superstitions
I was once told that it’s bad luck to be superstitious…so I try to avoid it. However, with the Phillies playing the Yankees in the World Series I feel the need to bring this up. There was a nice Bloomberg article this morning that pointed out that the last time a Philadelphia team won two back-to-back World Series titles was in 1929 and 1930 respectively. The Phillies won the title last year and they are up on the Yankees 1-0 so far in the current series. Given our current economic conditions and the Phillies strong showing thus far it has some analysts in the investment world pointing out the obvious correlation between the Phillies winning and our returning to another Great Depression. I don’t want to influence who you root for, I just want you to know that if the Phillies win and you rooted for them, and we get a double-dip recession…then it’s your fault. Full disclosure requires that I disclose that I have NO money on this game…honestly I don’t. If I did have any money on the Yankees I’d tell you…really I would.
As always, feel free to call or e-mail with any questions, comments or complaints.
Steve Scaramastro, SVP
Vining Sparks
800-311-0707
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