Help Coming for Second Half!?
Many attribute the current economic soft patch to the sovereign debt problems in Europe. Although this crisis has had an impact on the U.S. recovery, we believe this economic slowdown has a more conventional causeâi.e., the traditional interest rate hiccup. Normally, once a recovery takes hold, the Federal Reserve begins to tighten interest rates and bond yields back up causing a mid-cycle slowdown. This is what preceded the 1985, 1995, and 2005 mid-cycle slowdowns.
Exhibit 3 shows a very similar pattern of policy tightening leading up to the contemporary soft patch. From late last year until this spring, the 10-year Treasury bond yield rose from about 3.2 percent to about 4 percent, the national average 30-year mortgage rate jumped to over 5.5 percent, crude oil prices rose from about $70 to about $90, and the U.S. dollar exchange rate surged by more than 15 percent. Additionally, Chinese officials spent most of the last year tightening their domestic policies. The result? A âpolicy hiccupâ (rates, oil, and the dollar) combined to temporarily slow the pace of the economic recovery as previous âhiccupsâ have in past recoveries.
The good news is most of this policy hiccup has been reversed. The 10-year Treasury yield has declined below 3 percent, the national average 30-year mortgage rate has declined to almost 4.5 percent, oil prices are back in the mid-$70s, the U.S. dollar has retraced about half of its advance since late last year and China has completed its tightening policies. Just as the policy hiccup led to a slower recovery this spring, the reversal of this policy hiccup should help economic performance during the last half of this year?
Hang On
Stock market volatility is tiring, especially when it has gone on for so many years. So is the array of confusing economic reportsâsome good and some bad which seemingly offer little resolve. Finally, the number, variety, and persistence of new potential Armageddons is also fatiguing. Like others before it, this recovery wonât be a straight line and wonât be without doubts along the way.
But hang in there! Right now, while the soft patch is concerning, it appears to be a normal slowdown within an ongoing recovery. Underneath the daily litany of news is a slow but constant improvement in economic and financial market indicators. The economy is growing again (maybe not as fast and as consistently as we all want), profits are rising again, jobs are being created again, incomes are growing again, consumers are spending again, and stock, bond, commodity, and even housing prices are beginning a recovery.
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