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CNB Economic Comments August 11

August 11, 2014

The latest economic releases bring forth a few questions: Doesn’t better GDP growth suggest a stronger economy? Aren’t the growing employment numbers also good for the economy? Is the Federal Open Market Committee getting concerned about inflation? What’s wrong with the stock market?

First, the initial estimate for second quarter GDP growth was +4% (4% growth over the first quarter’s horrible showing of -2.1%). At first glance, it looks like a great number. When the numbers are analyzed, consumer spending did rise 2.5%, up from the first quarter’s 1.2% gain. However, almost all of the gain was in car sales, which continue to have good strength. The overall increase in total GDP was mostly due to a massive buildup (+17%) in business spending consisting of both inventory stocking and slightly better spending on buildings and equipment. Consumer spending has been sporadic for the entire first half of the year, yet business investment made a marked increase in the second quarter, suggesting that business leaders sense some increase consumer spending is coming soon. I agree, as June personal income and expense numbers as well as consumer confidence levels are stronger and rising. I’d look for consumer spending to exceed 3% in the third and fourth quarters, and should help bring full year GDP in above 2%.

As to the employment numbers, sometimes, as various people including former Texas football coach Darrell Royal, singer Shania Twain, and President Ronald Reagan said “You got to dance with who brung you…” in this case meaning the employment numbers may look good, but they may not be as pretty at second glance. We’ve had six months of 200,000+ job growth, and July’s increase was 209,000. There were good advances in construction and manufacturing, while growth in normally good areas like wholesale, retail, professional, health care, and government slowed. Moreover, looking behind the numbers, more than 50% of the jobs generated since the recession ended have been in part time and temporary positions, which often are lower paying. This fact begets the slow average wage growth number (about 2% annually since 2009) that also explains the uneven growth the economy is experiencing. Both businesses and consumers have been more cautious in their respective spending patterns, as is evident in the big inventory swings in business, and the stagnant new housing market. But, ever the optimist, I remember in 2009 when we were happy to see any kind of job growth… it’s getting better out there, just not as fast as some would wish.

Which brings us to the July 29-30 FOMC meeting. There were no real surprises in the press release, as bond purchases were tapered another $10 billion, economic growth “rebounded” (same verb as last month), and housing remains slow. Inflation “has moved somewhat closer to the committee’s longer-run objective”. Those words suggested to some writers that interest rate increases were back on the table as early as the first quarter of 2015. What some overlooked was the new statement: “a range of labor market indicators suggests that there remains significant underutilization of labor resources”. So a minority of FOMC meetings are fearful of inflation, but the majority see the still slack labor market as providing no inflationary threat. There will be no interest rate movement until some type of wage pressure develops.

The U.S. stock market is 8-20% higher in the past 12 months depending on which average you follow. European and Asian stocks have risen 4-20% in the same time period. With slow growth in Europe and Asia persisting, and political problems in the Mid-East and the Ukraine continuing, it’s probably time for a little correction. I wouldn’t be overly concerned with prices in general at this stage, and would be mindful of individual price swings. Bargains are hard to find, but earnings reports continue to support long term investors. At Thursday’s opening, for the week and thus far in 2014:


Dow Industrials         16443        -.3%         -.8%     
NASDAQ 4355 ----- +4.3%
S&P 500 1920 -.3% +3.9%

Treasury yields have stabilized after a couple of weeks of heavy fluctuation for the 10 year notes. That yield range is now 2.40%-2.60%, depending on the geo-political or economic news of the moment. Be happy you’re not a German sovereign buyer. Their 2 year is at .001% (yes, that’s essentially nothing) and their 10 year is at 1.08%. Muni supply appears to be slowly increasing, with no effect on yield yet.  


U.S. Treasuries
Municipal Bonds
  8/7/14   7/25/14   8/7/14   7/25/14
2 Year   .45 %   .49%   .33%   .33%
5 Year   1.64%   1.68%   1.23%   1.23%
10 Year       2.45%   2.47%   2.28%   2.22%