As the economy continues to soften and fiscal stimulus morphs into fiscal austerity, the Federal Reserve must decide whether the US economy can stand on its own, or whether the central bank must, once again, intervene actively to prop up the economy.

We think it unlikely that the central bank will move to stimulate the economy in the short-term – say, the next three months or so – for several reasons, not the least of them being that:

—The Fed probably believes that the slowdown is largely due to temporary or “one-off” factors such as the Japan’s massive earthquake, which temporarily delinked the supply chain; the “spring revolutions” and subsequent spikes in oil prices; and the recent confidence-killing debt standoff in Washington. If so, the Fed is likely to wait to see if demand comes back naturally.

—Core inflation is higher than it was a year ago, when the Fed instituted the last significant easing measure via large-scale asset purchases, which challenged the Fed’s ability to balance its dual mandate of “price stability” and “full employment.”

—Interest rates have recently moved down on their own (the coupon on the 10-year Treasury bond is currently at about 2.60%) and may be low enough to persuade the Fed that additional easing would have little effect.

Raising the Bar

In addition, and in contrast to last summer’s somewhat deflationary environment, today we’re seeing a tinge of stagflation – an unfortunate combination of economic sluggishness and rising price pressures – that raises the bar on the Fed’s ability to act.

As a result of these factors, we don’t expect further explicit easing in the near term. However, we do think it likely that the Fed will try to provide markets with a stream of assurances (via press conferences, leaks, and communiqués) that it will act if needed and that it will maintain its accommodative stance for an extended period.

The wild card in all of this – we think – is the unemployment rate. If it continues to rise, then the probability of Fed easing increases. Conversely, of course, if the jobless rate drifts lower in the months ahead, then the Fed will have less incentive to tighten monetary policy.

A Downward Dollar?

Our assumption right now is that unemployment will drift slightly lower over time. However, that assumption is being challenged by the reality of greater economic weakness and more political blundering in Washington that even we, as skeptical as we were, had foreseen.

We also believe that the Fed continued to lean toward a weaker dollar, but that it will not exert explicit pressure to move the currency lower. Nor will you hear Fed chairman Ben Bernanke assert that the dollar should fall. Nevertheless, we think that any significant rally in the dollar combined with weak financial markets and real growth of gross domestic product (GDP) of 1% or less would prompt the Fed to act to ease regardless of the risk of inflation.

With just one more Fed meeting before Federal Reserve voting members and other global central bank bigwigs travel to Jackson Hole, Wyoming, at the end of the month to pontificate on monetary policy, the world’s central banks face some difficult times. The European Central Bank figures heavily into the investing calculus over the next several weeks. With the credit crisis in Europe deteriorating anew (Rome is burning), it seems that nothing short of massive central bank intervention can stave off extreme damage to the European banking system.

No Easy Fixes

So central bank news will be breaking fast and furious over the next few weeks – and, in today’s world, it’s worth keeping tabs on this typically arcane financial area. After all, it was at last year’s gathering that Bernanke all but signed the paperwork for Fed’s last big easing campaign (dubbed Quantitative Easing 2 or “QE2”).

From our perspective, central bank policy is likely to disappoint those expecting easy fixes to big problems. But the recent market sell-off may have already priced in that disappointment, and so (and as always) we caution investors not to overreact to the market’s often knee-jerk reactions to short-term events. More positively, you may be able to use market weakness to rebalance portions of your portfolio, take advantage of potential opportunities or realign your investment holdings with your retirement goals.

This article was prepared by Contango Capital Advisor’s Investment Strategy Group. Contango Capital Advisors is an affiliate of Zions Direct.

IMPORTANT NOTE: Wealth management services are offered through Contango Capital Advisors, Inc. (Contango), a registered investment adviser and a nonbank subsidiary of Zions Bancorporation. Investments are not insured by the FDIC or any federal or state governmental agency, are not deposits or other obligations of, or guaranteed by, Zions Bancorporation or its affiliates, and may be subject to investment risks, including the possible loss of principal value of amount invested. Some representatives of Contango are also registered representatives of Zions Direct, which is a member of FINRA/SIPC and a nonbank subsidiary of Zions Bank. Employees of Contango are shared employees of Western National Trust Company (WNTC), a subsidiary of Zions Bank and an affiliate of Contango. CCA0811-0135

When will the Federal Reserve start raising interest rates?

What do you think about inflation?

These are the two most common questions that clients ask us. While we cannot predict the Fed’s timing, we can offer our thoughts about inflation, while noting that this is a really difficult time.

The US economy is currently in a period of slow growth. Most economic forecasters have reduced their GDP estimates for the 2nd half of 2011, based on factors including:

—The recent uptick in the unemployment rate to 9.1%, a signal that all is not well in the labor market.

—The continued slump in housing combined with anticipation that home prices will remain under pressure for the foreseeable future.

—Weak consumer confidence in the face of sluggish consumer spending, which accounts for approximately two-thirds of the economy.

—The impact of the Japan earthquake on economies throughout the world. Supply disruptions in the electronics and auto industry are the most visible examples.

—Higher energy prices forcing consumers to pay more at the fuel pump, diverting spending from other areas of the economy.

Under Pressure

The US central bank’s policy-making arm, the Federal Open Market Committee, (FOMC), is – as one would hope – fully aware of the pressures the economy faces. So, on June 22, 2011, the FOMC left interest rates unchanged, noting that the labor market is showing more weakness than anticipated while the recovery is continuing at a moderate pace, “though somewhat more slowly than the Committee had expected. … The Committee continues to anticipate that economic conditions – including low rates of resource utilization and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate for an extended period.” [Italics are ours.]

Like the Fed, we don’t expect inflation to rise dramatically. We believe that the current capacity utilization rate of 76.7% suggests that the industrial sector is not operating at its full potential. The range for this number over the past 20 years has been a low of 67.3% on June 30, 2009, and a high of 85.1% on December 21, 1994. In addition, we think that high unemployment will keep wages from rising without triggering “wage inflation,” while weak consumer demand will continue to dampen prices.

We share the FOMC’s view that short-term interest rates are likely to remain at their current levels for the next 9 to 12 months. However, we believe that yields at the longer end of the yield curve – 10+ years – could well move higher as the second round of the Fed’s quantitative easing program (QE2) winds down at the end of June.

What we have not said is that the government will need to “monetize” the deficit and inflate away the national debt. There seems to be no other way to address it. However, the debt and its possible consequences are a topic for another day.

This article was prepared by Contango Capital Advisor’s Investment Strategy Group. Contango Capital Advisors is an affiliate of Zions Direct.

The information contained in this article is not intended to be and should not be construed as tax advice. It is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. Contango Capital Advisors does not engage in the business of providing tax advice and estimates should not be construed as such. Clients should consult their tax professionals regarding their personal situation prior to taking any action based upon this information. CCA #0611-0109

For some time, we have forecast that inflation would return to relatively normal levels in 2011. In fact, we expect core inflation (inflation excluding food and energy) to rise from its near-zero year-over-year rate to closer to 2%. We expect high unemployment and sluggish growth to continue to cap inflation, likely offset to some extent by upward pressure on prices from the weak dollar, some wage growth, “imported inflation” in and from the emerging markets, and strong commodities market.

‘Flight to Quality’ Impact on Yields

In light of these factors, we’ve been suggesting that the range for bond yields this year (using the 10-year Treasury note as our basis) would range from 3% to 4%, finishing the year near the high end of that range. Right now, the markets are warily eyeing sovereign debt defaults in Europe that could reignite the debt crisis there, its impact possibly spilling into the US economy. Not surprisingly, this scenario has triggered a “flight to quality” that has pushed yields near 3%, the low end of our range. When adjusted for inflation (overall or “headline” inflation exceeds 3%), yields on 10-year notes are effectively negative. We do not think yields this low are sustainable.

But when will that change? The short end of the yield curve remains anchored near zero, courtesy of the Federal Reserve. Earlier this year we anticipated that the Fed might begin raising rates by the first quarter of 2012. In light of the slowdown, it may be tempted to wait even longer, perhaps until the middle of next year. Depending on how the economy develops, we may consider moving from short-term bond portfolios to slightly longer durations.

Choppy Equity Markets

We had forecast only moderate equity returns for 2011. We are sticking to this view. By the end of May, the stock market had gained about 5%. We don’t anticipate the S&P 500 exceeding 1400 in 2011, translating into a total return of roughly 6% to 8%. We anticipate a range-bound and increasingly choppy market as the year wears on. This is an environment in which it pays to buy on the lows and sell down on the peaks.

Our “buy” threshold has been the S&P 500 at 1250, while we continue to view 1380-1400 as a good point at which to consider selling. The stock market is holding up reasonably well, probably reflecting the growing belief that a third round of quantitative easing has become more likely.

There is no question that the economy is sluggish. Confidence is down. Job growth is frail. Wall Street is cutting GDP estimates. Home prices are in a double dip. Auto sales are slowing. And the pace of the slowdown has been both swift and alarming. All this said, however, we are not double-dip-believers. Monetary policy remains relatively easy and, while the “fiscal spending thrust” that supported GDP growth out of the trough is beginning to wane, we do not expect the federal government to change its spending ways drastically in the near term. At least as important are oil prices. The increase in oil prices in the last year removed about as much purchasing power as the payroll tax holiday put in. We anticipate that oil prices will fall as the world economy slows.

Watching the Risks

There is plenty to think about: the (possible) end of quantitative easing, the unsustainable situation in Europe, our own debt problems (as a highly partisan and split Congress confronts the need to raise the US debt ceiling), fiscal issues at the state and local government level, the creeping return of questionable credit practices, uninspiring valuations, heightened geopolitical uncertainty, the ailing housing market, the weak jobs market, China, etc., etc.

We continue to believe that investments in hard assets and emerging markets make sense in portfolios for the longer term. We also see other opportunities. Of particular note is the strengthening outlook for capital spending. As labor productivity peaks, we think it likely that companies will upgrade plant and equipment, fueling economic growth. Similarly, we anticipate ongoing, though slow, improvement in the labor market.

As always, we attempt to balance shorter-term developments in the financial markets with our longer-term views and investment objectives. We adhere to an investment discipline that prevents us from overreacting to dramatic, short-term market movements. We encourage you to do the same.

This article was prepared by Contango Capital Advisor’s Investment Strategy Group. Contango Capital Advisors is an affiliate of Zions Direct.

The information contained in this article is not intended to be and should not be construed as tax advice. It is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. Contango Capital Advisors does not engage in the business of providing tax advice and estimates should not be construed as such. Clients should consult their tax professionals regarding their personal situation prior to taking any action based upon this information. CCA0611-0093R

Neither current or anticipated economic growth rates are likely to be sufficient to offset the high levels of household, government and corporate debt the nation has accumulated.

With years to go before sectors such as residential construction recover fully from the credit crisis and ensuing recession, households are saving rather than consuming, while the corporate sector remains cautious. At the same time, regulators – coming in late and, arguably, with an inappropriate response – are focused on clamping down on “risky” loans. Unfortunately, in today’s environment, most loans are viewed as risky.

Slow Growth Ahead

As a consequence, the US financial system is only slowly regaining strength and building capital. Further, we expect that years of residential mortgage defaults, restructuring and defaults on commercial real estate and other business loans will continue to be a significant drag on economic growth.

Just as the economy offers few signs of accelerating, the federal deficit shows no sign of reversing, prompting virtually all economists to forecast large deficits five and more years into the future. The good news is that things could be worse. If interest rates were higher, the interest component of the federal budget would be much higher as well – possibly even higher than the $671 billion for defense that President Obama has proposed for fiscal 2012.

The Federal Reserve can control the short end of the yield curve (representing very short-term interest rates) for a while longer, but rates are very likely to rise at the long end of the curve. As the economy recovers, private credit demand will rise, adding to federal demand – and making investors nervous about how the government is going to deal with even more debt. These rising rates could push the government into a debt spiral à la Greece, a situation in which debt service grows so fast that tax revenue cannot offset the deficit’s rise.

Change Is Possible

The United States is not Greece. Both the president’s deficit commission and the Republican “Ryan proposal” illustrate that the government’s tax and expenditure structure can be adjusted to avoid the debt trap. The problem, then, is political rather than economic. With a presidential election coming, no one is willing to press for the needed changes in spending, tax and fiscal policy.

Moreover, and of equal importance, huge amounts of federal money are still being used to protect various special interests, primarily through the use of tax concessions.

Some people expect inflation to be used to disarm the debt trap, as it has in many other countries (and, indeed, in the US between 1945 and 1960). However, high rates of inflation are unlikely in a world of unemployment, excess capacity and reluctant lenders.

Moreover, it is not clear that our leaders really believe that inflation will be able to bail them out.

If inflation should spiral higher, interest rates will rise as well, not only pushing the federal government closer to the debt trap but significantly slowing the economy and further cutting government revenue.

Next Steps

What should a prudent investor do? For the moment, holding a broadly diversified portfolio, mainly in US dollars (which we think are oversold), significantly in blue chip equities (they are the most resilient), and with short-to-moderate bond duration makes sense. However, watch for the crisis to come. Capital preservation will then require a move toward a globally rather than a domestically oriented set of investments.

George Feiger is chief executive officer of Contango Capital Advisors, the wealth management arm of Zions Bancorporation (www.contangoadvisors.com).

]]> http://think.zionsdirect.com/2011/06/02/defusing-the-debt-trap/feed/ 0 http://think.zionsdirect.com/2010/10/11/changes-in-overdraft-protect/ http://think.zionsdirect.com/2010/10/11/changes-in-overdraft-protect/#comments Mon, 11 Oct 2010 10:00:59 +0000 Farrah Lamoreaux http://think.zionsdirect.com/?p=6592

In November 2009, the Federal Reserve issued final rules amending the Electronic Funds Transfer Act, also known as Regulation E. The new rules limit a financial institution’s ability to charge overdraft fees on ATM and one-time debit transactions that overdraw a consumer’s account, unless they have obtained the consumer’s affirmative consent, or “opt-in.” The new rule applies . . . read more Read More]]>

The phrases “Electronic Funds Transfer Act” and “Regulation E” may at first blush sound like complicated banking speak, but they are actually simple to understand and important to make note of, as both could affect your current overdraft protection choices.

In November 2009, the Federal Reserve issued final rules amending the Electronic Funds Transfer Act, also known as Regulation E. The new rules limit a financial institution’s ability to charge overdraft fees on ATM and one-time debit transactions that overdraw a consumer’s account, unless they have obtained the consumer’s affirmative consent, or “opt-in.” The new rule applies only to debit card and ATM transactions, and does not affect checks or other preauthorized recurring electronic payments, such as mortgages, utilities or gym memberships.

Prior to Aug. 15, 2010, Zions Bank, at its discretion, covered ATM withdrawals, debit card purchases and other transactions made using a Zions ATM or debit card, even if there wasn’t enough money in the account. Now, however, because of the changes to Regulation E, without a client’s explicit agreement, or opt-in, Zions can no longer assess a fee to cover ATM and one-time debit card transactions in an overdraft situation. If clients choose not to opt in for this overdraft privilege, the bank will not authorize transactions that overdraw an account.

What does this mean and how could it affect you? Consider the following scenario: You’re checking out at the grocery store and the cashier has rung up and bagged all of your groceries. You swipe your debit card to pay and it is declined.

Perhaps you made a simple error in calculating your balance, or a direct deposit you expected hasn’t hit yet. There is a long line behind you and you don’t have enough cash to cover the purchase. To make matters worse, you’ve left your checkbook and credit card at home. Prior to the Regulation E changes, Zions could make the decision to pay that debit transaction for you, even if you didn’t have sufficient funds in your account. Now, unless a client has specifically opted in, the bank cannot do so.

“Situations like this can and do happen from time to time,” says LeeAnne Linderman, executive vice president and executive director of Branch Banking at Zions Bank. “At Zions Bank, we offer services that provide protection against those simple errors, and you don’t pay any fees unless you actually have to use them. That’s something our clients value highly, so it’s important for us to make sure they understand this change and their options.”

Zions clients have three choices with regard to overdraft coverage:

• Courtesy Approval covers only ATM and everyday debit card transactions and is a service that now requires written or verbal authorization. Clients who do not currently have overdraft protection and who want to avoid having transactions declined due to insufficient funds must opt in. It does not cost anything to opt in; however, as in the past, the bank may charge an insufficient funds fee for transactions that cause an overdraft. Clients may also opt out at any time if they decide they do not want this protection.

• Overdraft Transfer Service links other deposit accounts such as a savings or money market account to a primary checking account, and allows the bank to automatically transfer money from one account to another to cover insufficient funds. The bank assesses a fee of $5 per transfer for this service.

• Check Reserve or Reddi-Credit is an overdraft line of credit that is attached to a checking account. This line of credit, available with varied credit limits upon approval, protects a checking account from overdrafts and insufficient funds fees. The bank charges $3 per transfer for this service, normally in increments of $100.

Clients who have already enrolled in the Overdraft Transfer or Reddi-Credit services will continue to have the same protection with no interruptions in service or additional need to opt in. Clients who would like to make any changes to their current overdraft protection choice should stop by their local Zions Bank branch, where associates will be happy to help and answer any questions.

Featured in the September/October 2010 issue of Zions Bank’s Community magazine.

Argument #1…Inflation

Let me think now…inflation is going to be a huge problem in coming years. Did you see the incredible $1,400,000,000,000 federal budget deficit last year, with the same, or higher, budget deficit this year? Did you see a similar budget deficit projection for next year?

Have you seen that the spend-happy Congress is now running a budget deficit of $160,000,000
every 60 minutes? Have you seen projections of $1,000,000,000,000 annual budget deficits for years to come?

Have you seen how the Federal Reserve has seemingly lost its collective mind, with a near tripling of its balance sheet during the past three years…all with money essentially created out of thin air?

The net result according to many “experts” must be a big surge in inflation in coming years. That’s why I better buy gold and other “hard” assets, and reduce my ownership of any financial assets such as bonds.

That’s why gold is back over $1,225 per ounce, with people who market gold saying it is “a great
time” to buy gold (when have they ever said anything different?) That’s why the experts say gold is soon likely to climb above $2,000.

Argument #2…Deflation

Let me think now…deflation is going to be a huge problem in coming years. Have you seen how residential real estate prices continue to decline? Have you seen how commercial real estate prices continue to weaken? Have you seen how much slack there is in the labor market, which could easily place downward pressure on wages? Have you seen how confidence in Washington DC is so low?

Have you seen how U.S. inflation continues to decline? Have you seen how the Consumer Price Index (CPI) now shows prices rising only 1.3% during the past 12 months? That the “core rate” of the CPI (excluding food and energy prices) is up only 0.9% during the past 12 months, the smallest rise in 45 years?

Did you see that when Japan’s asset and housing bubble burst in the early 1990s its economy went into eight consecutive years of deflation? Have you seen how the Japanese economy is dealing with deflation again?

Have you seen that declining prices are soon followed by declining incomes? Did you know history suggests that escaping a deflationary economy can be more challenging that dealing with inflation?

The net result according to many “experts” must be a big dose of deflation in coming years. That’s why I better buy high-quality, longer-term, fixed-rate U.S. government or corporate bonds and reduce my ownership of any “hard” assets, like gold.

That’s why investors have already pushed bond prices so high that the 10-year and 30-year U.S. Treasury bond investment returns (known as yields) have already fallen to around 2.65% and 3.75%, respectively…which, excluding a few weeks during the financial crisis, are the lowest levels in decades. That’s why 30-year fixed-rate conventional mortgages are below 4.50%.

That’s why the experts say bond prices will move even higher, with yields falling even further.

Inflation…or Deflation?

Two very different schools of thought.

Two very different investment plans.

Jeff Thredgold is an economic consultant to Zions Bank

Featured in the 17 May 2010 issue of Jeff Thredgold’s Tea Leaf newsletter.

We noted in our Tea Leaf issue dated July 29 that such a move to reappoint Bernanke would be a wise choice. His reappointment was also supported by roughly 90% of forecasting economists. Changing horses in mid-stream is not usually a good idea…and especially this time…given the depth, slippery rocks, and icy temperatures that “Captain” Bernanke is currently steering the economy through.

The President noted that Bernanke “has led the Fed through one of the worst financial crises that this nation and this world have ever faced. As an expert on the causes of the Great Depression, I’m sure Ben never imagined that he would be part of a team responsible for preventing another. But because of his background, his temperament, his courage, and his creativity, that’s exactly what he has helped to achieve.”

The Fed Chairman thanked the President for his “unwavering support for a strong and independent Federal Reserve.” Bernanke pledged “to help provide a solid foundation for growth and prosperity in an environment of price stability.”

Challenges Ahead

This reappointment, as well as Bernnake’s use of key terminology, was critically important because of the tough course that is yet to be followed by the Fed. At some point, the Fed will begin to withdraw much of the temporary monetary stimulus that has helped to stabilize the economy and financial markets.

These moves will be more of a two-step process than ever before. Unprecedented moves by the Fed, grouped under the banner of “quantitative easing,” have been undertaken during the past two years to help domestic and global financial markets return to some level of normalcy.

Many of these moves have had the desired effect. Other markets remain more limited in scope and volume, requiring a continued Fed participation.

More public will be the Fed’s first moves, expected by most forecasters sometime during mid-2010, to increase the federal funds rate from the record low target level of 0.00%-0.25%, which has been in place since mid-December 2008.

Rising Criticism

A possible series of modest tightening moves next year could draw strong Congressional criticism as it pushes financing costs higher. The Congress would make the case that “the Fed is taking the punch bowl away from the party just when the party in getting going.”

Come to think of it, the Congress ALWAYS complains when the Fed is pushing its key interest rate higher. Such moves could also draw criticism from the Administration, although such views would likely be expressed behind closed doors.

At this same time of rising tensions between the Fed and our illustrious elected representatives, Bernanke is very likely to be increasingly critical of the enormous budget deficits now expected. He will make it clear that deficits of roughly $1,000,000,000,000 annually during the next decade are simply not affordable and would do great damage to this nation…

…touché

Jeff Thredgold is an economic consultant to Zions Bank

Featured in the 26 August 2009 issue of Jeff Thredgold’s Tea Leaf newsletter.

Image used under creative commons.

Indeed, I would make the case that the Fed Chair, through his or her influence upon short-term interest rates (which leads to economic stimulus or economic restraint), current inflation pressures, and expectations of future inflation (which greatly influences the level of long-term interest rates), has perhaps more influence on our day-to-day lives than does the President.

The Fed has an ability you and I do not …the ability to create money. With this power comes enormous pressure from the bond market to do it responsibly so as to keep inflation pressures under control.

The Fed enjoys a reasonable level of “independence” to make difficult choices when necessary—such as pushing short-term interest rates higher to control inflation, usually resulting in a slowing economy and rising unemployment. This independence is vital to the Fed’s inflation-containment credibility.

Three major issues involve the Fed in coming months…

1) One of the most important decisions to be made by President Obama in coming weeks is whether to reappoint Federal Reserve Chair Ben Bernanke to another four-year term. Bernanke’s current four-year term ends in January 2010. In my view, the President would make a wise choice in reappointing Bernanke, a view shared by more than 90% of forecasting economists in a recent survey.

What we don’t need is greater uncertainty about monetary policy. Were Obama to propose someone seen as an Administration “puppet” in regard to impending monetary policy, similar to President Carter’s disastrous appointment of G. William Miller as Fed Chair in 1978 (which led the U.S. dollar sharply lower and long-term interest rates sharply higher, tied to loss of credibility), the results could rival those of three decades ago.

The Fed, along with the U.S. Treasury, has taken unprecedented steps during the past two years to avoid the potential of an even greater domestic and global economic calamity than currently exits. As some suggest, the “Depression” option is no longer in the cards.

The Chairman has drawn frequent criticism for some of the steps taken, including the “bailouts” of Bear Stearns and AIG. In hindsight, some of that criticism may be warranted. However, the financial system was on the brink of collapse last fall. Aggressive steps were required and delivered

2) The second major issue is the desire of many in the Congress to bring the Fed under greater Congressional control. One effort, led by frequent Presidential candidate Rep. Ron Paul, seeks a regular audit of the Fed’s conduct of monetary policy. Paul seeks the elimination of the Fed itself. Given the Congress’s highly political bias, and inability to keep wasteful spending under control, one simply cringes in fear at the prospect of the Congress having a greater say in the conduct of monetary policy

3) The third major issue is how and when the Fed will implement its “exit strategy” from recent extraordinary monetary stimulus. The Fed is widely expected by forecasting economists to begin pushing its key short-term interest rate higher within 6-9 months from today’s historic low. Various moves to reverse other forms of unprecedented stimulus, known as “quantitative easing,” will likely begin by the end of this year.

Jeff Thredgold is an economic consultant to Zions Bank

Featured in the 29 July 2009 issue of Jeff Thredgold’s Tea Leaf newsletter.

*Artwork from franckie under Creative Commons license at Flickr.com.

Without a doubt, the recession that began in December 2007 has shaken up our perspective on the economy. Beyond the pressing issues facing Americans who have lost their jobs or their homes, the outcome of this recession centers on changes in the monetary and fiscal policies that underlie our economy.

What do these factors mean to you?

Fiscal vs. monetary: Monetary policy involves actions of the Federal Reserve as it relates to the money supply to support economic growth and control inflation (usually opposing forces). Fiscal policy involves decisions by Congress and the Administration regarding federal budgets, spending, taxation and deficits.

Growing national deficit: The national deficit has nearly doubled in the past decade to $11 trillion today. Future generations will face increasing tax burdens — and potentially less personal wealth — as that bill comes due.

Tighter inflation controls: The Federal Open Market Committee at its December meeting established the lowest-ever target federal funds rate of 0 to 0.25 percent. Rates have not been this low since the rate began to be tracked in 1955, when a postage stamp cost 3 cents and a brand-new Corvette could be had for $2,774. Future rates will remain very low to encourage the flow of funds and greater economic activity.

Increased federal investment in the market: To support the financial markets, the Federal Reserve is buying securities (bonds) for which little market exists. A bond is simply a loan, with an associated principle (face value), interest rate (yield) and repayment schedule (term). When the Federal Reserve purchases these securities, two things occur: The money used to buy the assets is released into the marketplace to be used for lending and other economic activity. Also, the act of buying these securities improves the marketability of these securities and raises their prices. As prices go up, yields, or interest rates, go down.

Featured in the Spring 2009 issue of The Vectra Vault.

*Artwork from franckie under Creative Commons license at Flickr.com.

One more month…one more exceedingly painful U.S. employment report

We have now had seven consecutive terrible job reports since the American consumer was told “the sky was falling” last September 18 by Federal Reserve Chair Ben Bernanke and then-U.S. Treasury Secretary Paulson. It was on that day that this dynamic duo emotionally and very publicly asked the U.S. Congress for $700,000,000,000 to fix financial markets.

That request, and the up-and-down discussion within the U.S. Congress during the following week, simply scared the American consumer to death. The consumer stopped spending…companies of all sizes adopted a “shoot first, ask questions later” approach to layoffs…and the economy dropped quickly. The rest, as they say, is history.

U.S. Employment Growth

The Numbers
Total U.S. employment fell by another 663,000 net jobs during March, matching economists’ consensus view. February’s previously reported loss of 651,000 jobs was not revised. That’s the good news. However, January’s previously reported (and previously revised) loss of 655,000 jobs lost was revised to show a loss of 741,000 jobs during the month—the worst month for job losses in 59 years. April losses will be ugly as well.

Equally painful was the surge in the nation’s unemployment rate from 8.1% in February to 8.5% in March, the highest level in 25 years. By comparison, the jobless rate was 5.1% just one year ago. The jobless rate averaged 4.6% in both 2006 and 2007 and 5.8% during 2008. An American jobless rate at or slightly above 9.5% is a real possibility within the next 9-12 months.

Economists have pointed out a handful of more positive economic statistics in housing, manufacturing, and retail sales in recent weeks to suggest that the U.S. economy is seemingly in the process of bottoming out. The consensus view of forecasting economists, as well as the collective view of the stock market, is for a return to marginally positive (yes positive!) U.S. economic growth during 2009’s second half.

We continue to expect GDP to be slightly positive during the fourth quarter. There was nothing in the March employment data to support this view, although yes, employment data is a lagging economic indicator.

Job Demise
The American economy has now lost 5.1 million jobs since the U.S. recession officially began in December 2007. Nearly two-thirds of the job erasures have occurred during the past five months alone.

As noted previously, the net loss of 3.1 million jobs during 2008 was the worst year for employment since 1945. To illustrate just how bad the first three months of 2009 have been…if no additional job losses were recorded over the balance of the year, 2009 would still be the fourth worst year since the U.S. Labor Department began tracking such data in 1939 (CNNMoney.com).

Inside the Pain
To illustrate just how pervasive and all-encompassing the current lengthy recession is, almost no employment sector is avoiding job cuts. The nation’s goods producing sector lost another 305,000 jobs during March. U.S. manufacturing was hit with the loss of another 161,000 jobs during the month, the 16th consecutive monthly decline. The nation’s embattled construction sector lost another 126,000 jobs, the 21st month in a row of cuts.

Equally dismal was the 358,000 net decline in service sector employment. The professional & business services sector lost another 133,000 jobs, while retail trade saw another 48,000 jobs bite the dust. Leisure & hospitality lost another 40,000 jobs, the finance industry lost another 25,000 jobs, and government employment declined by 5,000 positions. Only the education & health services category saw rising employment, although the net increase of 8,000 jobs was the weakest in that sector in many moons.

Better news was found in regard to the average hourly wage, which rose 0.2% (three cents) to $18.50 hourly. While the 3.4% rise over the past 12 months is hardly worth writing home about, it looks good versus consumer inflation which has been essentially zero during the past year.

More Jobless
Almost everyone knows one or many people who have seen their jobs disappear during the past 12-24 months. Prospects to replace these jobs with similar income levels are, for most, difficult. Such is the nature of a recession, especially the long and deep variety from which we are currently suffering.

A record 13.2 million people are now officially unemployed. Even more painful is the “underemployment” rate. This rate, which attracts rising attention each month, includes those who are unemployed, those who are working part-time but would prefer to work full-time, and those discouraged people who have dropped out of the labor force but would accept a job if one were offered…

…the “underemployment” rate is now 15.6%, up from 14.8% in February, and the highest since this particular measure began being tracked 15 years ago. This rate will move higher in coming months as well.

College Grads
Current job prospects for new college graduates are dicey. The National Association of Colleges and Employers forecast that employers will hire 22% fewer graduates this spring (The Associated Press).

More newly minted graduates are required to pound the pavement for jobs, rather than simply waiting for recruiters to visit their campuses. That may actually be a good thing. Since the average graduate will change jobs three times within five years of graduation, developing good job search skills now may just come in handy.

Pick Your Poison
No gender, race, or education level avoided the employment ax in March. The jobless rate for adult men spiked from 8.1% in February to 8.8% in March as traditionally male-dominant (can I say that?) sectors such as manufacturing and construction got hammered. The jobless rate for women rose from 6.7% to 7.0%.

The jobless rate for Whites rose from 7.3% in February to 7.9% in March. The jobless rate for those workers of Hispanic or Latino ethnicity rose from 10.9% to 11.4%. The jobless rate for Blacks or African-Americans actually dipped by 0.1%, but was still an unacceptably high 13.3%.

Unemployment rates for those of all educational levels also rose during the month. Those with at least a bachelor’s degree had a jobless rate of 4.3%, with the rate moving higher for those with less education. The jobless rate for those with less than a high school diploma? 13.3%!

We will get through this recession, but seeds of new growth will continue to be seen in other sectors besides and before employment.

Jeff Thredgold is an economic consultant to Zions Bank

Featured in the 8 April 2009 issue of Jeff Thredgold’s Tea Leaf newsletter.

*Artwork from Rob Sheridan under Creative Commons license at Flickr.com.