WSJ Monthly Survey of Economists

Faster job growth, consumer confidence (albeit volatile recently) and lower energy prices will boost US growth in the 3Q (+3.2%) and 4Q (+3%) this year.  Inflation adjusted consumer spending will grow 2.6% in the 2H this year, helped by lower energy prices (by 13bp in the 3Q and 21bp in the 4Q).

Oil prices are expected to close 2014 at $91.16, down $9 from June predictions. Inflation expectations are consequently lower, expecting annual CPI growth of 1.9% by year end.
Employment growth will average 214,000 over the next year, (227,000 current year average). Therefore unemployment will finishing the year at 5.8%, then finish 2015 at 5.4%.

The only headwind to growth lies internationally as Europe and Asia slow, while a stronger dollar curb US exports. That and some hesitation to higher interest rates… but higher rates only come when the economy is strong enough to support them.

THE TRADE (risk off) buy dollar, treasuries and sell Euro, Yen, commodities, small-caps and emerging markets.  Buy domestic large caps with little international exposure.  Dollar vs. Ruble looks perfect.

Why Tomorrow’s Payrolls Will Beat

Expectations for tomorrow’s employment report sour even though most indicators through the report’s March 16 cutoff remained unchanged compared to the prior month.   February  showed a 246,000 payroll increase, yet tomorrow the market only expects a 195,000 gain.   While ADP and Challenger reports (see March 3 & 4) have warned of weakness, jobless claims remain unchanged from February through March 16.  Furthermore the index’s 4-week average hit its best level of the recovery in March.  ISM Manufacturing increased employment (+1.6 to 54.2)  while its service counterpart showed a small decline (-3.9 to 53.3), however both indexes remain above the employment-growth-level of 50.

February’s ADP estimates missed the actual payrolls report by 48,000 last month and was consequently revised higher by 39,000 yesterday.  Another miss like that indicates  +206,000 private payrolls tomorrow.  While shoddy at best, this thinking suggests that there have been no substantial declines in economic activity since February’s 246,000 private payroll gain, therefore tomorrow’s reading should be closer to February’s gain rather than the market’s lowered expectations.

March 19-20 FOMC Meeting

FOMC GDP forecasts

WSJ 3/21/13 

            FOMC Meeting:  The committee voted 11-1, holding policy at 0-0.25% and continuing QE programs.  Ester George dissented, as expected.  While continuing the $85bn ($40bn LT treasuries & $45bn MBS purchases) Bernanke warned these purchases would adjust as economic activity improved.  Such orchestration will nevertheless begin once the job market shows fundamental improvements.  “I think an important criterion would be not just the improvement that we’ve seen, but is it going to be sustained for a number of months?” Bernanke wondered aloud.  While unimpressed with the extent of employment recovery so far, he also holds little excitement for stock’s recent rally, pointing out that inflation weighted indexes are nowhere near record highs.

            FOMC members agreed that moderate economic growth would resume after the 4th quarter slowdown, as consumers and businesses increase spending, housing grows and employment expands.  Amidst this growth longer-term inflation expectations remain anchored under 2% for the next 3 years, enabling the Fed’s expansionary policy to remain focused on its employment target.  Bernanke noted that fiscal policy has become more restrictive to growth in 2013, estimating a total fiscal impact of -1.5% to this year’s growth.  Consequently their 2013 GDP estimate dropped to 2.6% from 2.7% despite becoming more bullish on employment, forecasting a 2013 unemployment rate of 7.4%, down from 7.6%.  The text “easing financial conditions” was removed from the statement, perhaps indicating FOMC members see little US fallout from the Cyprus credit-crisis.

Bernanke addresses Ester George’s worries that the QE program proposes “risks to financial stability, if persistently low rates lead some market participants to take on excessive risk in a reach for yield.”  Nevertheless he did not mention if such bubbles were forming (see Higher Yield).

Bernanke’s term as chairman expires in January 2014 and expectations foresee no third term for the recession weary combatant.  History suggests Bernanke will not change policy before his successor takes over, suggesting no QE adjustments until 2014.  He admits, “I don’t think I am the only person in the world who can manage the exit.”

GDP: March Change from December
2013: 2.55% -0.1%
2014: 3.15% -0.1%
2015: 3.3% -0.05%

Twin Peaks

2007 Today
10 Year Yield: 4.64% 1.90%
High Yield: 8.5% 6.6%
VIX: 17.5 14
Gold: $748 $1575
Dollar / Yen: 117 93
Unemployment: 4.8% 7.9%
Size of Fed Balance Sheet: 0.89T $3T
Consumer Confidence: 99.5 69.6
Gas: $2.76 $3.74
Mortgage Rates: 6.38% 3.53%
Student Loans: $590B 1.074T