July 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 July 30, we expect the Fed to leave rates unchanged between zero and 0.25%. It still looks like 2015 will be when the fund rate begins to shift higher.


  • The year-over-year consumer price index (CPI) released in June shows inflation at 2.1%. This was the third step in an upward trend that started at 1.1% in the March announcement. We expect a pause this month with inflation remaining in the current range when the data is released in July.

Economic Activity

Now HiringRev

  • The final revision of the calculation of first-quarter gross domestic product (GDP) was a -2.9%. This means the economy shrank at an annualized 2.9% rate in the first quarter of 2014. Yes, cold weather gets the blame, but that is too large of a setback to ignore more broad economic reasons.
  • Even if growth snapped back in the second quarter and grew at 3%, combining the first and second quarters means that the first six months of the year had nearly no growth at all. That is not very convincing progress for economists who had expected 3 to 3.5% growth. We are still sticking with our expectations for GDP growth around the range of 2% in 2014.
  • Fed officials often refer to the unemployment rate as a gauge of economic strength. Cheers to Janet Yellen who recently commented that it doesn’t provide a complete picture. She instead referred to the labor force participation rate as being the lowest since 1978 (low is bad). This also happens to be our favored method of looking at employment in the U.S. as we present our economic outlooks each spring.
  • Wages reflect economic conditions in local markets based on supply and demand. If Walmart offered minimum wage of $7.25 per hour (or $10) in the Bakken oil producing area of North Dakota, it wouldn’t be able to staff its stores (picture taken from Arbor Research).

Fixed Income

  • It continues to be difficult to find value when looking for bonds to purchase. Now it is getting hard even to find bonds available for purchase. We see this as one of the reasons bond spreads (the yield above comparable U.S. treasury bonds) are so low.
  • Some Fed board members suggest rates need to stay low for even longer than expected which, in turn, brings an increasing prospect of instability at some point in the future.
  • It is very difficult to find a balance between yield and maturity in the bond market.

Stock Market

  • Investment theory says the market is made up of individual investors who make rational decisions based upon information available at the time. Rational behavior may have taken a back seat to a herd mentality. Volatility is very low, suggesting a large portion of investors are all thinking and doing the same thing.
  • We expected the stock market to finish the year up 5% to 9%. At the end of June, we are already in the middle of that range near 7%. We also expected volatility, but that has mostly been absent … so far….
  • Complacency in the market seems to be at an extreme, where only positive developments are considered. The problem is that final revisions to first-quarter GDP left little to be positive about, yet the market shook off the negative results as backward looking. At the start of the year, economic forecasts looked forward to 3% to 3.5% growth – but confirmation of the economy shrinking is now backward looking?

View previous Economic Outlook newsletters.

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