Economic Update, 1st Quarter 2015: “Déjà vu All Over Again”
Ah, springtime in the South. That glorious two-week period between winter and humidity! One of the things I love about spring is the start of baseball season. One of the sport’s most beloved heroes, Yogi Berra, had many pithy quotes, including the one above.
The first quarter of 2015 indeed felt like Déjà vu, as similar to 2014, a harsh winter held back construction and lead to sluggish GDP growth of 2.2% (and this number is expected to be revised lower). Further suppressing growth, consumers have increased saving and continue to pay down debt instead of spending extra income from lower gas prices.
While the coldest February on record for parts of the Northeast kept consumer spending subdued, there was continued good news on the job front, as the unemployment rate fell again – to 5.5%. This is very near what most economists consider to be “full employment.” This and other indicators point to (finally) increasing wage growth in the coming months.
Interestingly, the unemployment rate is now well below its long-term average, and also below the level the Fed originally targeted to begin raising interest rates. One of the reasons we believe they have not raised rates yet is because inflation continues to remain low. However, after several months of declines, the Consumer Price Index (CPI) finally rose and is up 1.7% year-over-year. As CPI growth (hopefully) reaches 2.0% or higher, the Fed is widely expected to start raising rates later this year.
In our view, moderately higher rates will be good news for the economy. For one thing, it indicates that the Fed recognizes the economy is strong enough to remove the emergency-level rates that have existed since the economic crisis several years ago. Near-zero percent borrowing rates left unchecked for too long will eventually lead to asset bubbles and other misallocations of capital. This may already be happening in parts of the credit markets, and is one reason we remain conservatively positioned.
Finally, global growth on balance looks to be picking up modestly. Europe and Japan are both following the US lead and engaging in their own forms of Quantitative Easing (QE). This has had the effect of pushing sovereign yields in some countries into negative territory. Those unattractive conditions have led more foreign capital to buy (relatively) attractive U.S. Treasuries, which is keeping a lid on our interest rates. That demand is also pushing the U.S. dollar higher, which is now up over 20% against the Euro in the past six months or so (chart below).
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