August 2014 Economic Outlook


Read our Economic Outlook, a monthly newsletter authored by Greg Sweeney, CFA, chief investment officer at Bell State Bank & Trust. Sweeney holds a bachelor’s degree in business from the University of North Dakota, is a CFA charter holder, and is a 28-year veteran of the Investment Management team.


Federal Reserve Monetary Policy

  • At the next Federal Reserve meeting on September 17, we expect the Fed to leave rates unchanged between zero and 0.25%. The Fed’s quantitative easing program is winding down. It still looks like 2015 will be when the Fed fund rate begins to shift higher.


  • The year-over-year consumer price index (CPI) released in July remained at 2.1% as expected. There could be another push slightly higher this month, but probably not above 2.2%.

Economic Activity

  • Gross domestic product (GDP) calculations for reporting changes in the U.S. economy were revised by the commerce department. The updated calculations altered most statistics back to 1999. This is similar to adjustments that have been made over the years to the consumer price index. If the data doesn’t turn out as desired, change the calculation until it does. This revision produced a favorable update to first-quarter GDP, moving it from -2.9% to -2.1%. The first release of second quarter GDP showed annualized growth at 4%. Will news media report that these revisions to GDP calculations had a negative effect on the last three years data, showing the economy grew less than previously reported? We still expect real GDP growth for the full year to be around 2%.
  • Economists remain encouraged about future economic growth prospects, pointing to continued job growth stet. We would be more excited about job growth if it were accompanied by growth in wages.
  • There has been a big push since the economic slowdown started in 2008 to use monetary policy themes generated by the Fed to stimulate the economy. We propose that letting workers keep more of their earnings would be a better way to generate economic growth. Burdensome regulations also drain a lot of productivity from the system. Unfortunately, both of these solutions require Congressional effort, and by the looks of it, there are very few politicians working on behalf of constituents.
  • How do regulations hurt progress here and overseas? Here is an excerpt from a Bloomberg news story: “French President Francois Hollande’s government may have made a housing slump worse, pushing the construction market to its lowest in more than 15 years. Housing starts fell 19% in the second quarter from a year earlier, and permits — a gauge of future construction — dropped 13%, the French Housing Ministry said yesterday. The rout stems from a law this year that seeks to make housing more affordable by capping rents in expensive neighborhoods. To protect homebuyers, the law also boosted the number of documents that must be provided by sellers, leading to a decline in home sales and longer transaction times. While the government is now adjusting the rules, the damage is done, threatening France’s anemic recovery that’s already lagging behind those of the U.K. and Germany. ‘Construction is in total meltdown,’ said Dominique Barbet, an economist at BNP Paribas in Paris. ‘It’s difficult to see how the new housing law is not to blame.’ Barbet says the drop in home building lopped 0.4 points off France’s gross domestic product growth last year and cut the pace of expansion by a third in the first quarter.”

Fixed Income

  • Low yields persist even as the Federal Reserve continues to reduce its quantitative easing program. Keep in mind that even though U.S. government bond rates are low, they are higher than those in Canada, France, Germany, Spain, Sweden, the Netherlands, Switzerland and Japan. If the dollar remains strong, our interest rates are attractive to investors in all of these countries.
  • Many investors had moved away from bonds as an investment option due to low yields. Year to date, the return on the 10-year U.S. Treasury bond is 6.8%, which beats the S&P 500’s 4.3% return as of July 31.
  • We are not suggesting a big push into bonds. This is just a reminder that when volatility increases, bonds tend to be more stable than stocks. Will Rogers once mentioned that he was more concerned about the return OF his principal than the return ON his principal.

Stock Market

  • The stock market spent most of the month of July trading in a narrow range, until downward pressure developed towards the end of the month.
  • Investors will now sort through the selloff, earnings reports and economic data to determine if they present another buying opportunity or if additional caution is prudent. The S&P 500 was up 140 points to 1,988 for the year at its high on July 24, only to lose 60 points by the end of the month and knock the return from 7.5% to 4.3%. The Dow only shows a slight gain for the year after the selloff.
  • It would not be a surprise to see a bit of a market recovery going into August. We suggest reviewing your asset allocation in relation to your personal investment profile, if you have not done so recently.

View previous Economic Outlook newsletters.

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