We’ll Miss You, Ben
Now that the holidays are over, it is time to recognize that January, 2014 marks the last month as Federal Reserve Chairman for our favorite helicopter pilot, Ben Bernanke. He was just in Philadelphia on January 3rd delivering his last public speech and he nostalgically proclaimed that “the recovery remains incomplete,” which will qualify his comment for the understatement of the year award.
Despite his heroic efforts, including a Fed Funds rate near zero for the past five years, forward guidance, scatterplots, press conferences, a new “openness,” and his trillion dollar QE bond buying programs, economic growth has not returned to “normal.” Our student of the Great Depression tried everything. He succeeded in saving us from true disaster in 2008, but has not been able to accomplish his goal of strong economic growth.
To put that GDP growth into perspective, consider that, in the three years following the recovery which began in June, 2009, real GDP averaged +2.2%. In the ten previous recessions, real GDP averaged +4.6% during a recovery. This helps to explain the Fed’s continued easy money policies, stretching now into year six. It also helps to explain my constant whining about sub-par growth!
Ben, we will miss you tremendously when you ride into the sunset on January 31st and we eagerly anticipate the reign of your successor, Janet “She Devil” Yellen. She will continue your zero rate policy and will “taper” your QE 3 program, because the markets have already dismissed its impact and tightened long term rates despite your wishes.
Incidentally, your QE 1 to 3 programs ran for six years, accumulated three trillion dollars of securities, and pushed long term rates lower when your forward guidance could not do so. But in nine short months of 2013, you and the Fed stumbled with mixed signals and miscommunication and the markets pushed the 10 year Treasury yield up by 130 basis points to 3.00%, removing all of the good attained by QE over the years.
This anomaly occurred despite inflation readings that are trending downward in both the producer and consumer price indices. Mortgage rates rose just as much and they may potentially damage the housing market recovery. Another anomaly continues in that the 3.00% yield on the 10 year Treasury is much higher than the dividend yield on the S&P 500 index of 2.15%. Stocks are supposed to have more risk. That is all I will say on stock markets, because they usually sell off once I write in depth about them, although PE ratios are fairly average and don’t call for huge correction. It shows that while the Fed may have a tight grip on short term rates, the market will decide long term ones.
Cautious Growth for 2014
We expect that GDP growth will continue in a cautious mode in 2014, likely between 2% and 2.5% once again. Many of our bank’s customers remain cautious about borrowing and spending on large projects. Many businesses remain uncertain due to the increased regulatory burden, the drama in the insurance markets due to Obamacare, income tax changes, and a still high unemployment rate at 7%, which serves to keep personal incomes in check and consumer spending under wraps.
Despite the “headwinds” mentioned above, the Federal Reserve has very optimistic GDP forecasts for future years, with 2014 at 2.8% to 3.2%. The National Association of Business Economics, or “NABE,” is almost as optimistic at close to 3%. Some of Wall Street’s brokers expect more moderate growth, with Sterne Agee at 1.7% to 2.3% and Janney Capital Markets at 2.1% to 2.5%.
I find it interesting that these same forecasters expect continued drops in the unemployment rate, with the Fed lowest at 6.3% to 6.6% in 2014, yet growth is not even returning to the normal post-recession pace of 4.6%.
That is because the unemployment rate itself is also an anomaly, having fallen from above 8% in the third quarter of 2012 to 7% in November, 2013, mostly from people dropping out of the labor force and not from the measly pace of job creation, whether viewed from the payroll or household survey. The labor force participation rate has fallen from 66% pre-recession to 63% currently. The primary aggregate impact on the economy of this difference of 3 million workers no longer participating in our labor force is reduced income and thus, reduced purchasing power.
And so, we find ourselves over four years removed from the end of the last recession, a time when most recoveries would be ending, and this one has barely begun. The data as of late has continued to improve. Real GDP grew by 4.1% in the third quarter of 2013, but the strong growth numbers were the result of huge inventory building, to the tune of nearly $116 billion annualized. No wonder retailers were slashing prices for the Christmas holiday spending season.
This high GDP number aside, we still have slow growth and structural changes occurring in our workforce, resulting in less income, less spending, and more incessant whining by me.
Businesses are still cautious in capital spending. Several wild cards may improve growth—such as energy availability and prices, improvement in overseas economies in Europe and Asia, and our new Fed Chairman, Janet Yellen, who should follow the low rate policies. And so, all of this adds up to cautious optimism for 2014.
Our Philadelphia Eagles excited us and made us optimistic that their 2014 will be bright. We can be proud of what they achieved this year under new coach, Chip Kelly. I keep thinking back to the Phillies playoff loss in 2007, which taught them “how to lose” before they came back strong and won it all the following year in 2008. Just saying...
And so, as I finish writing this, the polar vortex is about to give us two of the coldest days and nights in over twenty years. But we count our blessings; it will be back above freezing in a few days.
Thanks for reading and Happy New Year! DJ 01/06/14
Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy has been with First Federal of Bucks County since November, 2004.