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CUNA's Hampel to CNN Money: GDP contraction not a recession

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WASHINGTON (1/31/13)--A fourth-quarter contraction in the U.S. economy is not a harbinger of recession, a Credit Union National Association economist told CNN Money Wednesday.

Federal government spending cuts and a drawdown of inventories by businesses caused the economy to contract for the first time in three years, CNN Money said.

"No one I know would seriously call this an indicator of recession," Bill Hampel, CUNA chief economist, told the publication.

Gross domestic product--the broadest gauge of U.S. economic growth--shrank at an annual rate of 0.1% last quarter, the Commerce Department said Wednesday. That constituted the first quarterly contraction since second quarter 2009, during the Great Recession.

Defense spending declined 22% in the fourth quarter, the department said. In the GDP report, defense spending usually is a volatile number and is not likely to decrease as much this quarter, Hampel told CNN Money

The other drag last quarter was a drawdown of inventories. "Businesses were selling in the fourth quarter, but not replacing the stuff on the shelves," Hampel told the publication. "When inventories fall in one quarter, they're really likely to rise the next quarter."

The basic driver of the economy--consumer spending--appears to be in good shape, Hampel said, adding "the momentum in the economy is positive but not booming."  

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Fed maintains policy, don't expect relief from low rates, says CUNA

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WASHINGTON (1/31/13)--Federal Reserve monetary policymakers voted Wednesday to continue their policy of purchasing bonds and Treasuries and tying the near-zero federal target fund interest rate to unemployment. That means credit unions should not expect any quick relief from low rates, said Credit Union National Association Chief Economist Bill Hampel.

This month the Federal Open Market Committee's (FOMC) "tone was slightly more positive," said Hampel. "Despite noting that 'economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors,' the committee acknowledges the recent strengthening of the economy."  For example, it noted that "business fixed investment advanced," compared with December's statement, "growth in business fixed investment has slowed," Hampel told News Now. This month, the FOMC said "strains in global financial markets have eased somewhat," vs. December's statement of "strains in global financial markets continue to post significant downside  risks."

The FOMC said in a statement issued Wednesday after meeting two days that it is continuing the policy established at its December meeting of buying $85 billion in bonds each month--$40 billion in mortgage-backed securities and $45 billion in long-term Treasury bonds. It also kept the quantitative easing policy in place until gains in employment are "substantial," and indicated it would  keep short-term rates at near-zero levels at least as long as the unemployment rate remains above 6.5%  and if inflation forecasts remain near the fed's 2% target.

"For credit unions, this means don't expect any quick relief from very low interest rates, especially on the very short end," Hampel told News Now. "However, the Fed's statements imply that longer-term rates could rise before shorter-term rates," he said, indicating the Fed "could back off of the [third round of quantitative easing] (QE3) before they raise the Fed funds rate."

"Since the last FOMC meeting, we are six weeks closer to the eventual rise in longer-term interest rates, and that increase in long-term rates could come before many people expect," Hampel added.

FOMC's statement was released the same day that the Gross Domestic Product report indicated a 0.1% contraction in the economy. Steve Rick, CUNA senior economist, noted that the Fed has evaluated the risks to the economy and placed more weight on the weak economy as opposed to worries of higher inflation. Looking further into the numbers shows "brighter signs as consumer spending and business investment spending accelerated," Rick told News Now.

The Fed's "preferred inflation measure, the Personal Consumption Expenditure Price Index, rose only 1.2% in the fourth quarter, down from 1.6% in the third quarter," Rick said. "The Fed would like to see inflation in the  range of 1.75%-2%.  For all of 2012, GDP expanded at a 2.2% growth rate, slightly below the economy's potential growth rate.  We expect the economy to expand 2.5% in 2013 as the housing recovery accelerates and consumers release pent up demand for durable goods," Rick said.

"With little expectation of the Federal Reserve reversing monetary policy and raising interest rates in 2013, credit unions should expect loan demand to increase 5%, up from a 4% pace set in 2012," he added.

In its statement Wednesday, the FOMC said it expects that "with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the committee judges consistent with its dual mandate" of fostering maximum employment and price stability.

"Although strains in global financial markets have eased somewhat, the committee continues to see downside risks to the economic outlook. The committee also anticipates that inflation over the medium term likely will run at or below its 2% objective."

The "highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens," said the FOMC. Its "exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than a half percentage point above the committee's 2% longer-run goal, and longer-term inflation expectations continue to be well anchored."

"When the committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2%," the FOMC said.

New voting members among Federal Reserve Bank presidents who vote on the policy decisions are: Esther George, Kansas City Fed; Charles Evans, Chicago; Eric Rosengren, Boston; and James Bullard, St. Louis. Voting for the FOMC monetary policy action were: Chairman Ben S. Bernanke; Vice Chairman William C. Dudley; Bullard; Elizabeth A. Duke; Evans; Jerome H. Powell; Sarah Bloom Raskin; Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen.

George, the only dissenter, expressed concern that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.