|
U.S. Third Quarter Growth Hits 5%
by John M. Curtis
(310) 204-8700
Copyright
December 23, 2014
All Rights Reserved.
When Federal Reserve Board Chairwoman Janet Yellen
finished her Open Market Committee Dec. 17, she calmed Wall Street saying she’d
be “patient” about raising interests.
When markets opened the next day, the Dow Jones Industrials was already
nearly 500 points higher, with the S&P and Nasdaq following right behind with
strong advances. One week later, all three averages broke new records with the Dow going over the once
unthinkable 18,000. While the
nation’s biggest funds are doing their utmost to squeeze as much profit out of
2014, reality will set in after the New Year.
While today’s report that GDF growth for Q3 hit 5% was reason to
celebrate, it changes Yellen’s “patience” when it comes to raising the Federal
Funds rate, now stuck at zero-to-a-quarter percent now since former Fed Chairman
Ben S. Bernanke dropped the key borrowing rate to zero Dec. 16, 2008.
Bernanke took extreme measure to keep the U.S. economy from crashing into
another Great Depression, dropping the Federal Funds Rate to zero and starting
quantitative easing in June 2010, buying $30 billion of U.S. treasuries a month. After Lehmann Brothers and Bear
Stearns went broke in 2008, Beranke bought $600 billion worth of toxic mortgages
in 2008 and another $700 billion worth after President Barack Obama became
president Jan. 20, 2009. After
three rounds of quantitative easing, Yellen ended the once $85 billion a month
bond buying program Oct. 29, 2014, letting the banking sector that once held
over $2 trillion in toxic mortgage-backed securities go it alone. Without quantitative easing, Yellen
wanted to wait-and-see banks capital reserves before beginning the inevitable of
raising the Federal Funds rate, something that could happen
sooner-rather-that-later.
With a consensus that Yellet would raise the Federal Funds rate in June
2014, all bets are off now that GDP growth topped five percent. Rocketing over 18,000, the Dow reflected the positive growth climate but hasn’t yet
priced in what happens if-and-when Yellen hikes rates. Some analysts, like New York
University Stern School economist Nouriel Roubini, see a geopolitical minefield,
especially with Ukraine, the battle with ISIS and Israeli-Palestinian conflict
potentially spoiling Wall Street’s current euphoria. “After four years of a rocky
recovery, the U.S. economy is now hitting its stride, with a notable
acceleration in growth in recent quarters,” said Gus Faucher, senior economist
at Pttsburg, Pa.-based PNC Financial Services Group. Faucher sees growth continuing through 2105.
“And growth should remain good next years, with lower gasoline prices a big plus
for consumers.”
Beranke and Yellen were reluctant to raise rates because the overall
inflation rate continued too low, causing more worries about deflation than
inflation. After the 2008 Great
Recession, some economists worried about the U.S. economy falling into decades
of slow growth, much like Japan whose economy crashed in what’s know as the Lost
Decade starting in 1991 but now spanning another decade to current time. Yellen has been more worried about
deflation up-till-know, watching carefully consumer spending accounting for
about 70% of GDP growth. It remains
to be seen whether or not the 2014 holiday retail purchases will add to GDP
growth. Now that Yellen ended QE3,
what the Fed doesn’t want is to hike interest rates and crash the stock market. She’s especially concerned with the
anemic real estate recovery, where new and existing home sales have been falling
for months.
Without a robust real estate recovery, consumers will eventually run out
of cash to fuel the consumer spending needed to improve long-term GDP growth. News that Bernanke and Moody
Analytics Mark Zandi had trouble refinancing their homes gives some insights
into what’s wrong with the real estate market.
Except for a very few exceptions in New York City and exclusive parts of
California, new and existing homes sales have stalled out. New lending guidelines designed to
spur home sales from government-owned lending giants Fannie Mae and Freddie Mac
haven’t yet helped. Lowering the
down payment requirement to three percent should help first-time buyers but only
if they can qualify under strict debt-to-income ratios. Many qualified borrowers with sound
FICO credit scores can’t qualify for government-backed mortgages because they
can’t document enough income.
Adding 320,00 jobs in November was the largest monthly gain since 1999,
though it’s not clear whether it includes part-time employment. While Yellen can’t base her decision about hiking rates on slow growth in Europe or
China, global events can impact the U.S. economy. No one knows how low oil prices will
go, wreaking havoc in Russia, where a combination of economic sanctions and low
oil prices practically guarantee recession in 2015. Recession in Europe, China and Russia, doesn’t help American firms doing business
overseas. Since any number of
geopolitical events could derail the good times on Wall Street, Yellen would
help the economy grow on a solid footing by working with Fannie Mae and Freddie
Mac to reinstate a practical guidelines on mortgage lending. As long as it’s difficult to qualify
for mortgages, the real estate market will stay flat, hurting long-term U.S. GDP
growth.
About the Author
|
