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April 15, 2013

Economic Update

By Georgi Popov '13  |  april, 2013, Issue 1
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The stock market lost some of its momentum after the disappointingly low payroll employment numbers released on Apr. 5. The expectations were that the economy would add about 200,000 jobs for the month, but the Bureau of Labor Statistics' report revealed an increase of merely 88,000 jobs. The main drags came from retail trade employment (declining by 24,000 after adding an average 32,000 jobs per month over the prior six months) and government (U.S. Postal Service employment fell by 12,000).

The unemployment rate fell from 7.7% to 7.6%, but only because the civilian labor force declined by 496,000, meaning that about half of a million Americans stopped looking for work. The numbers are certainly not what many hoped for, nor expected, but we should not overreact. Jobs gains for February were revised upward to 268,000 from an initial 236,000, and in January to 149,000 from an initial 119,000, making the slowdown in March look worse than it actually is. Therefore, it is likely that the current equity markets weakness is only temporary.

Other macro indicators painted a mixed picture. The numbers of new and pending existing home sales declined, while home prices posted a healthy increase of 8.1% in January. Consumer confidence fell for March, but consumer sentiment showed a modest increase. The Institute for Supply Management released its Purchasing Managers' Index (PMI) at 51.3% for March, which shows that the growth in the manufacturing sector has slowed down. Meanwhile, light vehicle sales continue to improve due to favorable interest rates and an aging vehicle stock.

Economic growth is likely to slow down in Q2 of this year mainly due to tax hikes and federal spending cuts. Fiscal policy will remain a drag on the economy for some time to come, but monetary policy support and building momentum should be more than enough to keep both the macro cycle and the market cycle intact. Recent statements by Fed officials suggest that the central bank may adjust the pace of asset purchases in response to changes in the outlook, but such a change is not imminent and policy accommodation is expected to remain in place. The Federal Open Market Committee (FOMC) announced that a low federal funds rate would be appropriate as long as the jobless rate is above 6.5% and inflation expectations remained tamed, but policymakers have stressed that even this level should not be viewed as a trigger for monetary tightening. For equities, this means that the intervention from the Fed will continue to be favorable.

Last Updated 4/15/13
Last Updated 4/15/13