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Economic Outlook

An editorial opinion 
by Derek Vogler, CFA^® 
Vice President - Investments

April 10, 2013

Central bankers and politicians across the globe continue to tinker with policies to mask their respective slowdowns, hide their past excesses and re-ignite growth in their economies. The two latest examples happened in the tiny country of Cyprus and most recently in Japan. Last month, government officials in Cyprus (under the encouragement of the other members of the EU) decided they would confiscate some bank deposits to help bail out the country and recapitalize its failing banks. While the idea of taking money from depositors seemed almost crazy when it was first announced, the proposal moved forward. The shape of the plan ended up changing somewhat, taking into account the size of the accounts. Depositors with under €100,000 were left alone, but those above that amount will pay a yet-to-be determined “levee” of up to 40%. Without these additional funds, the EU would not have agreed to essential bailout money and their membership in the EU and use of the Euro would have been in jeopardy.

This month the Japanese decided they would use the U.S. idea of Quantitative Easing, but magnify it significantly. Our Federal Reserve is currently pumping in $85B per month into the system by purchasing government debt. The new Japanese plan calls for the equivalent of $75B that they hope will actually inflate their economy. What’s most amazing is the size of the $75B compared to their market. For perspective, this would be equivalent to $225B per month here in the U.S. – truly a staggering figure. Unlike the U.S. program, which has only been approved for government and agency debt securities, the Japanese have also decided that some funds can be used to purchase stock market investments through exchange traded funds and even purchase real estate indirectly through REITS. Since the announcement, the Japanese stock market has soared, while the Yen has plummeted. This is just what you’d expect from such a program, but rarely do these plans have the exact desired effect. It will be interesting to see how this plays out over the coming months.

Here in the U.S., we have started to see a slowdown in employment and even a variety of other economic variables. During March, payrolls increased by an anemic 88,000. At the same time, there was another decline in the unemployment rate to 7.6% - the lowest since 2008. While on the surface this seems positive, a closer look reveals that the drop was due to an increase in the number of people who left the labor force. The result is now the lowest labor participation rate since 1979. Sequestration cuts, which kicked in on March 1 are being blamed for much of the slowdown. Current expectations have the negative impact on future payrolls to be somewhere between 50,000 and 75,000 per month while these cuts are in place. Roughly 75% are expected to come from government jobs. While many people believe these are exactly the types of cuts that are necessary to reduce our longer-term debt burden, politicians are already clamoring for the next round of discussions that could reduce the pain from the sequestration.

Now that employment appears to be cooling and we have seen some other data on housing, manufacturing and retail sales begin to weaken, there are some who believe that this recovery is in jeopardy. The tell-tale signs are definitely in place with government spending cuts, year-end tax increases, and stubbornly high energy prices. The big question is, will the existing momentum, combined with continued Fed action be enough to maintain slightly positive growth? The answer is anything but clear at this point, but the outlook will be challenging given the increasing number of headwinds.

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