July Economic Outlook
This is a monthly newsletter 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 25-year veteran of the Investment Management team.
Federal Reserve Monetary Policy
- The next Federal Reserve meeting is scheduled for August 9. The Fed continues to be concerned by the slow rate of growth compared to the economy’s potential. We do not expect the Fed to change its position on the Fed funds rate, leaving it between 0 and 0.25%.
- The year-over-year consumer price index (CPI) is 3.6%. This is a notch higher than our expectation last month of 3.5%. Even though there has been some relief from declining energy prices, we expect the next report to show an increase in inflation once again. We estimate the next release to show 3.8% inflation.
- “A rising market hides a lot of mistakes, while a falling market exposes them.” This is a longstanding portfolio management saying that continues to ring true. It is also interesting to note its application to the federal budget. As long as the economy was growing at 3 to 4%, a lot of poor political decisions were hidden from the voter’s view. Now that growth is slower (we see core growth in the 1 to 1.5% range), the folly of unchecked borrowing has been exposed and needs to be addressed. This is where the difficulty begins. Show me a politician who wants to go back to his or her home state and say, “Good news, we just decreased federal spending on our state’s programs by 10 percent!”
- How far down the road is major fallout from our debt problem? This is the 10-year forecast from the Congressional Budget Office as of July 7, 2011. The smallest deficit is still greater than a half a trillion dollars, even after the aggressive assumption that tax collections increase by 15% in 2012, 21% in 2013, and 11% in 2014.
Projected Deficits and Surpluses in CBO’s Baseline (billions of dollars)
Total Actual 2012- 2012- 2010 2011 2016 2021 Total Tax 2,162 2,228 16,570 39,084 Total Outlays 3,456 3,708 20,117 46,055 Total Deficit (1,294) (1,480) (3,547) (6,971)
- Can the wealthy cover the deficit? The most recent data breaking down taxes by percentile of wage earners was from 2008. In that year, a person earning more than $159,619 per year was in the top 5% of wage earners. If the United States were on a pay-as-you-go system and looked to just this group as the source of revenue to eliminate the annual deficit for the fiscal year ending Sept 31, 2009, the tax rate would have to quadruple for this category. (In other words, it’s unlikely to happen.) The U.S. is running out of income to tax to keep up with spending.
- The return after inflation for the 10-year Treasury is worse than it was last month. Now, it’s -0.46%.
- Second-quarter earnings reporting begins in July and should continue to show improvement.
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