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CNB Weekly Economic Commentary: April 1

April 3, 2013

To: Everyone
From: Gregory S. MacKay, Senior Vice President & Chief Economist
Date: 03/29/13

There’s still a lot of concern out there about our economy. I thought I’d start today by telling you about a country whose Gross Domestic Product increased 22% from 2011 to 2012. Its inflation rate dropped 32% to below 2% for the same time period. The country’s total government spending, a source of concern for most countries, fell 1.7% in 2012. Like many countries, there is a constant need to expand exports and shrink imports. This country cut both imports and exports in 2012, yielding a small positive contribution to its economy. In the face of slow global growth, it hosted a substantial boom in construction spending on both homes and business properties. Its citizens responded to all this good news by slowing their personal spending for the year, but not by enough to severely impact the overall economy. Who is this country that seems to be doing fine? Of course, it’s our good old U.S.A. Hearing about the economy this way sure seems a lot better than it’s been presented elsewhere… and that’s my point. A non-scientific presentation of these facts to the average person on the street netted me a lot of different replies, and a general consensus that this presentation seemed more upbeat than what many people had been feeling. Now let’s see if the news spreads.

For the record, U.S. Gross Domestic Product rose 2.2% for 2012, up from 1.8% gain in 2011. This was accomplished by relatively good consumer spending (but weaker than in 2011), a huge rebound in both residential and non-residential construction, a decline in overall government spending, and a tiny positive contribution from exports. Real disposable personal income rose 1.5% (a 3.3% increase reduced by 1.7% inflation – I know – governmental math isn’t always the best). That figure isn’t robust, but it’s certainly better than a lot of people thought, and does fall within the “moderate” category. So we all should be feeling better about the economy. The Fed’s policy of easing money has begun to bear fruit in the housing and stock markets, both of which are responding well. But the depth of the “Great Recession” lingers in some minds. The latest polls of the two major consumer sentiment indices are split… one up, one down. It appears that most of the public is aware of and participating in the expansion, but there are still a number of citizens out there who are concerned about the future.

At its regular March meeting, the Federal Open Market Committee (FOMC) talked of a “return to moderate economic growth after a pause late last year”. While still mentioning unemployment and restrained fiscal policy, the FOMC highlighted housing spending, business spending, and low inflation as ongoing drivers of the economy. For the still unconvinced, the FOMC stated that both the monthly addition of $85 billion to the economy and low short term interest rates will continue for now. The hint remains that FOMC sees part of its effort as offsetting fiscal and global problems. The economy is in the early stages of sequestration and the sky hasn’t fallen yet. There’s a lot of angst out there, but consumers are not going to ground.

Personal income (adjusted for inflation) rose .7% and expenditures were up .3% in February. Expenditures were the same as in January, when income dropped because of the 2012 year end income advances done by many companies. So consumers seem to be handling these month to month adjustments quite well. Toss in the fact that Congress has begun to pass its usual series of spending band-aids, and I’ll suggest the money being pumped in by the Fed will offset most of the perceived problems by year end.

In closing, I do want to put some numbers on the housing situation. It’s now impossible to avoid, there’s a housing boom going on out there. In February, both housing permits and starts were 30% higher than a year ago. These increases were caused by the surge in both new and existing home sales. Sales of existing homes are 10% higher than a year ago, inventory has dropped 19% in a year, and prices are 10-12% higher than a year ago. New home sales are up 12% from February 2012 levels, prices have risen, and inventories are at ridiculously low levels. No, it’s not too late to buy… interest rates are still at or near all-time lows. However, prices at 2008-2009 levels are long gone… but are still at 2003 levels. If you haven’t looked yet… it’s time. This ongoing housing expansion will help the economy continue to grow for some time.

Doesn’t the stock market just love all this news? Mid-to-large cap indices are bouncing around all-time highs, as the general feeling remains that American markets are the best. In a holiday shortened week, at Thursday’s close for the week and year:

Dow Industrials 14579 +.5% +11.3%
NASDAQ 3268 +.7% +8.2%
S&P 500 1569 +.8% +10.0%

There has been some price appreciation in both 10 year Treasuries and Munis. Yields remain uninviting in both products.

  US Treasuries
Municipal Bonds
  3/29/13 3/18/13 3/29/13 3/18/13
2 Year .24% .24% .36% .36%
5 Year .76% .80% .92% .91%
10 Year 1.85% 1.95% 1.96% 2.06%