Economic Commentary
Daniel Laufenberg, Ph.D.

Numerous economic data series are released between the publication dates of the Laufenberg Economic Quarterly (LEQ). Therefore, this page is designed to provide commentary on the more recent data and their implications for the economic outlook.


Economic Press Conference in honor of U.S. Open
(June 20, 2014)

After watching a few minutes of a press conference on the Golf Channel in connection with the U.S. Open, I decided to hold a press conference of my own. Here is how it went?

LQ: Thank you ladies and gentlemen for being here today and for your interest in my upcoming forecast. I can only say that I will do my very best to provide an accurate outlook and a correct interpretation with regard to financial markets. Indeed, these are very interesting times with historically low interest rates, a very uneven recovery, a stubbornly high unemployment rate, and geopolitical risks surfacing once again. Conditions are very complicated and difficult to navigate, but I will try to put forth my best game. Are there any questions?

Q: Are you concerned that your excessive optimism about your outing (forecast) may require an adjustment in view of your last performance?

LQ: I am surprised that the U.S. economy struggled as much as it did in the first quarter but not surprised by the cause of that struggle. Recall that I had expected the weather to have an adverse effect on the economy in the March forecast, just not as severe as it was. At the moment, it looks as if the real gross domestic product (GDP) will be revised even lower.

With regard to the outlook, I have not made any major changes other than raise the near-term growth forecast to reflect the rebound owing to a return to a somewhat more normal weather pattern. In fact, the weaker the first-quarter is, the stronger the rebound.

Q: Since your game fell short of expectations last time, why should we believe your optimism now?

LQ: Good question. The basis of my game plan is that the first-quarter drop was due primarily to the weather, which means that a return to something more normal will foster a rebound in economic activity. In fact, more recent data, such as motor vehicle sales, housing starts, inventory accumulation, industrial production, capital goods shipments, suggest that such a rebound is underway. Real GDP is currently on track to grow nearly 4.0% at an annual rate in the second quarter. I expect it will do even better than that once the final estimate is made. Moreover, I continue to expect real GDP growth to average over 3.0% in the second half of the year.

Q: Will that be good enough for you to reach your goal for all of 2014?

LQ: The severe winter weather postponed a lot of spending decisions but it also canceled some. It is the spending that was canceled that will not be part of the rebound, suggesting that real growth for all of 2014 probably will not be as robust as the 3.0% suggested earlier. But it still will be fast enough to cause the unemployment rate to fall further and for inflation risk to be more of an issue. In other words, not unusually fast but fast enough!

Q: Your ability to scramble (interest rate forecast) seems a bit off again. Will this ever change?

LQ: Nothing is forever. Exactly when the Fed starts to raise rates is still unclear. That being said, it may happen sooner than the consensus and the current direction from the Fed suggests. Again, the economy may not be growing as fast as we would like, but it is growing fast enough for the unemployment rate to fall further. If the Fed waits for full-employment before it acts, it probably will have waited too long to avoid an inflation problem from developing. In fact, I suggest that the Fed has waited too long already.

Q: But isnít hitting all greens in regulation (full employment) a desirable objective?

LQ: Absolutely! But it is also important how we get there and whether it is sustainable. Remember that business cycles have not been repealed, which means that there will be another recession. If this is the case, then policymakers cannot avoid another recession, but they can influence how severe it might be. I contend that a shift in Fed policy sooner rather than later does not remove the risk of recession but it would increase the likelihood that the next recession will be far less severe than the one we just experienced. However, the longer the Fed waits, the greater the imbalances in financial markets and in the economy when the recession does come, which means a more pronounced recession than otherwise.

Q: When will you no longer be at the top of your game (the next recession)?

LQ: I donít know. Clearly we are a lot closer to the next recession than we are to the last one. If you pressed me on this point, I would probably say that it now looks to be 2016.

Q: Back in 2007 you were talking about losing your game (a recession) but thought it wouldnít happen until 2009. You lost it at the end of that year. What makes you think you will be right this time?

LQ: Like I said, I really donítí know when the next recession will begin. I just donít think it is this year or next. The imbalances are not in place to suggest it will happen sooner. Of course, we donít always see the imbalances until they implode. In 2007, we were talking about a recession beginning in 2009 at the earliest. We thought it would be inflation that would eventually be the problem rather than housing. As it turned out, it was inflated house prices that were the problem. However, I said at the time that the next recession would be more severe than anything we had experienced since the early 1980s only because the 1990 and the 2001 recessions were very mild by historical standards. Hence, just a normal recession would be more severe than anything most people had experienced. But even that was an understatement.

For a similar reason, the next recession may not be as severe. I doubt that the imbalances will develop to the same extent that they did in the 2000s or be the same as they were at that time, suggesting that the downturn will be less pronounced.

Q: Does that mean that your putting (stock marketódrive for show, but putt for dough) will not deteriorate as much as it did last time?

LQ: It depends. During the last recession, the S&P 500 stock price index fell 57% from its peak on Oct. 9, 2007 to its trough on March 9, 2009. There are at least two factors involved; how much higher the stock market will go before the next recession and how impatient individual investors are likely to be.

Over the last several decades, individual investors have had more influence on their retirement portfolios than they did in the more distant past owing to the increased popularity of 401k pension plans and IRAs. Prior to the 1980s, a defensive position in private defined-benefit pension plans managed by professionals was a 10% move out of stocks into bonds, as well as a shift to more defensive stocks. Also prior to the 1980s, public pension plans had very little exposure to the stock market. Now days, individuals have more control over their retirement portfolios than in the past. And too many investors panic and sell their entire equity position in a downturn, exacerbating the decline. This causes stock price indexes to move to more extreme levels than prior to the 1980s, both up and down. It could be that individual investors have learned their lesson and will not be as greedy on the way up or as fearful on the way down, but I doubt it.

Q: Are you saying that even if you are not putting very well, you still want to be on the green?

LQ: In most cases, I would say it would because there are too many moving parts to get it right every time. Qualified accounts (tax deferred or tax free) make it easier for individual investors to bail out of the stock market because there are no tax consequences for doing so. This is both a good and a bad thing. It is good because it allows investors to sell gains without any tax concern. It is a bad thing because it makes it easier for individuals to be market timers. And for the most part, individuals are terrible market timers, buying when prices are high and selling when prices are low.

In nonqualified accounts, taxes are an issue and should be part of the decision to sellótax rate on gain versus expected decline in value. In other words, the more taxes that are likely to be paid on a sale, the larger the decline in the market needed to make selling everything worthwhile after taxes. In this case, all you need to know is whether the market is going to decline and how far. However, just as important is to know when to get back in. No one said it would be easy.

LQ: That ends the press conference for today. Please sign-in to additional updates to the game plan as they occur. Thank you. period




For the current economic forecast, as well as other analysis and commentary, please visit the Stonebridge Capital Advisors website.

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The views expressed here reflect the views of Daniel Laufenberg as of the date referenced. These views may change as economic fundamentals and market conditions change. This commentary is provided as a general source of information only and is not intended to provide investment advice for individual investor circumstances. Past performance does not guarantee future results.

2014 Commentary

Press Conference in honor of U.S. Opens
(current article)
-- June 20, 2014

Implications of an even weaker First Quarter
(current article)
-- March 29, 2014

-- March 3, 2014

2013 Commentary

-- October 25, 2013

Doomsday forecasts: Honest people can disagree
-- April 26, 2013

Making sense of the February jobs report
-- March 10, 2013

Growth gyrations continue
(current article)
-- January 28, 2013

2012 Commentary

Optimism, not irrational exuberance
-- October 15, 2012

Disappointing but far from disastrous
-- July 31, 2012

Assessing the recent weak economic data
-- June 8, 2012

Consensus too pessimistic about everything
-- April 16, 2012

Risks to the forecast
-- March 7, 2012

A good finish to 2011 but still not good enough
-- January 27, 2012

2011 Commentary

More evidence of a strong finish
-- December 22, 2011

Finishing Strong
-- October 14, 2011

Living in interesting times
-- September 8, 2011

A not so pleasant surprise!
-- September 2, 2011

-- August 16, 2011

Debt ceiling politics
-- July 25, 2011

Q2 growth: Another disappointment likely
-- July 14, 2011

Interpreting the ISM manufacturing index and the employment situation report for May
-- June 4, 2011

A slower start to 2011 than anticipated earlier
-- April 14, 2011

Is the dollar's status as the reserve currency at risk?
-- March 21, 2011

More trouble in the Middle East
-- February 26, 2011

Searching for the next debt crisis
-- January 13, 2011

2010 Commentary

What's going on?
-- October 15, 2010

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