Federal Reserve & Interest Rates

The Commerce Department released it’s second quarter GDP data on Friday and it showed that the economy shrank by 1%, which was better than the 1.5% many economists were forecasting.  However while many analysts now feel that the economy may be on the brink of a recovery there are some caveats.

  The decrease in real GDP in the second quarter primarily reflected negative contributions from nonresidential fixed investment, personal consumption expenditures (PCE), residential fixed investment, private inventory investment, and exports that were partly offset by positive contributions from federal government spending and state and local government spending.  Imports, which are a subtraction in the calculation of GDP, decreased.

      The much smaller decrease in real GDP in the second quarter than in the first primarily reflected much smaller decreases in nonresidential fixed investment, in exports, and in private inventory investment, upturns in federal government spending and in state and local government spending, and a smaller decrease in residential fixed investment that were partly offset by a much smaller decrease in imports and a downturn in PCE.

Since the smaller than expected fall was primarily due to increased fiscal spending by the government don’t expect any big recovery anytime soon.  Consumer spending is expected to remain flat and with unemployment expected to grow through the end of the year, it’s probably not going to feel like a recovery for many Americans.

The housing market may or may not be finally hitting it’s bottom and the stock market remains down although it did stage a mini-rally this month.  However with many businesses still struggling and continuing to cut back on their workforce to control costs, it could be at least another year before jobs start growing again.

Until there is job recovery, consumer spending which makes up the bulk of the economy, will likely remain muted.  Many Americans are avoiding spending and as a result the overall savings rate has risen to around 5.2%.

Many Americans are still worried about the job situation, so there is no wonder that consumer confidence remains so low.  While this and last year’s stimulus payments provided a small boost to consumer spending levels, that only lasts for a period of a few months before falling back down once again.

Even if the economy does show some form of growth this year, the time frame for the recovery is expected to be long and slow process.  So much wealth was lost in such a short period of time and it could take years for it to grow back to their former levels.

A lot of experts have been claiming that the recession is about to end, maybe it is and maybe it isn’t.  We’ve seen both the stock and commodities markets both stage mini-rallies only to come quickly back down to earth.

Investor have been trying to figure out what these little glimmers of positive data really mean but so far it hasn’t meant much.   The banking system is still in a precarious position and credit remains scarce.

Consumer demand has remained depressed and the slight boost it received from stimulus payments will soon end.  Coupled with rising unemployment that is expected to climb until at least the end of the year, we can see why any outcries of a recovery are meaningless at this point.

Some companies have reported some surprising earning which helped buoy the stock market for a little while but that too should be taken as a grain of salt.  Much of the climb in net income for many companies had to do with revaluing assets that were at depressed prices.

Even if we do hit the bottom fairly soon, the road to recovery appears to be long and arduous.  The housing market remains in shambles and eventually the debt the government added to save the banking system will have a negative impact on economic growth.

The government’s fiscal and monetary policy actions likely averted another Great Depression but it also served to extend the timeframe of the decline, albeit at a much slower pace.  Until the financial system is on much firmer ground, the credit just won’t be available to fuel a recovery.

While the economy is still embroiled in a recession, there was some positive news today when the Commerce Department released it’s June figures on new home sales.  However while purchase activity has risen the last few months, prices still remain depressed.

The Commerce Department said Monday that sales rose 11 percent in June to a seasonally adjusted annual rate of 384,000, from an upwardly revised May rate of 346,000.

It was the strongest sales pace since November 2008 and exceeded the forecasts of economists surveyed by Thomson Reuters, who expected a pace of 360,000 units. The last time sales rose so dramatically was in December 2000.

Much of the activity can probably be attributed to the Fed’s actions in the mortgage securities market which helped lower rates to all time lows a few months back but have risen somewhat since then.  Some prospective buyers may also have been prompted to act now on the fear mortgage rates will climb even further.

The financial system is still shaky but there is some credit available to those with good credit scores.  Foreclosures remain high and with unemployment expected to climb up to the end of the year, it is still a cause for concern and blunts some of the optimism from today’s figures.

So while this shouldn’t be taken as a sign of an impending recovery, most analysts agree that the pace of decline has definitely moderated and the housing market may finally be hitting bottom.  Prices won’t recover overnight and it’s going to take a long recovery period like the rest of the economy.