No Knee-Jerk Reaction This Year
The market welcomed Bernanke's pass on another round of easing and the extension of next month's meeting.
The market spent most of the week waiting for Ben Bernanke's speech, mainly to see whether he'd implement an asset-friendly QE3 program. Although initially disappointed by no QE3 announcement, the market took some solace in the fact that Dr. Bernanke promised to extend September's normal meeting by a day just to evaluate what further measures could be adopted by the Fed to help the economy along. He very carefully said he would do what he could to help but postponed any big new project, at least until he could see whether his no-interest-rate-increase pledge of two weeks ago produces the desired effect. While not new or unexpected, I am very pleased the Fed took a pass on knee-jerk reaction that could have produced QE3. I hope this will take more air out of the commodity bubble in the ensuing weeks. That should make the consumer a little happier in the months ahead.
Economic Data Relatively Tame
The widely expected second-quarter GDP revision was negative, reducing growth to just 1.0% from the previously announced 1.3%. Slower exports contributed to the revision as did a surprise slowing in inventory growth. The more important consumption and business spending portions of the report were revised upward. The footnotes also indicated that disposable income, after inflation, would be marked up to about 1.1% from 0.7% after just revising the data downward last month during the benchmark revisions. Durable goods orders also looked surprisingly strong overall, but certainly not in every category. Manufacturing isn't dead yet, at least according to this report and last week's industrial production report. Housing prices also logged their second increase in as many months.
GDP Growth Stalled in the 1.5%-2.5% Range, Despite What the Statistics Say
The up-and-down revisions of the personal income report cited above combined with a lot of contradictory reports make the job of economist even harder. Some of the best employment numbers of 2011 now look like they came during the months of the worst economic conditions. Likewise, the Institute of Supply Management Reports on Manufacturing have been trending down since early in the year at just about the same time real manufacturing data and orders began improving (or at least held their own). And after a series of revisions, the economy looks like it bottomed in the March quarter and that both the June and September quarters showed marked improvement. These data seem to defy the consensus view that we had a reasonably strong spring and have just now entered a soft spot and that the economy is on the way down. Changing seasonal patterns, up-and-down inflation, high gas prices, and the Japanese tsunami have done major damage to the reliability of the short-term economic indicators that have been so valuable in the past. My guess is that we have been stuck in pretty narrow 1.5%-2.5% growth range over the last year that hasn't gotten much better or much worse despite what the statistics say.
Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.