Daily Bullets….for July 11, 2014

·         Reduction in growth estimates for U.S economy……National Association of Business Economists (NABE) latest consensus forecast has downgraded their estimates for growth of U.S. economy for the second quarter from 3.5% to 3%. One of the factors cited for the slowdown is slower than expected consumer spending, which is forecast to grow about 2% vs. prior estimates of about 3%. Growth in exports in Q2 is also expected to be slower than expected at about 2.5% vs. previous estimates of 3%.

What’s the point? We continue to believe economic growth will accelerate in 2H-14. What is interesting is the downgrade in forecast for consumer spending. We think this is part and parcel of what has been dubbed “the new normal” economy, a euphemism for a slow growth economy led by a secular decline in growth rate of consumer spending. Aside from what you want to call it, we believe the “new normal” for consumer spending is real due to demographic changes, slower job  and wage growth, slower growth in government spending. Areas of the economy that should continue to grow at a stronger pace are productivity investments, technology spending, and business and industrial capital spending, all of which we think can grow at or over twice the pace of the overall economy. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140711&id=17767636

·         Fed closer to raising rates?.....Philly Fed President Charles Plosser stated this morning that the Federal Reserve may be closer to raising rates than people think given firmer economic and inflation data.

What’s the point? There has been much debate over when the Fed would begin raising (Fed funds) rate. The question is when, not if, and the financial markets are expecting the increase sometime in 2015. The Fed looks at the same data you and I do, for the most part, and financial markets will react to economic data long before the Fed makes a move (this has been the case for decades). No one can forecast the future. While the probability is the economy will strengthen, there are still many cross-currents that could hold growth and inflation to moderate levels, which would take some pressure off the Fed to raise rates. As we’ve said before, we think the Fed will be very transparent and communicate clearly, if not in advance, its goals for interest rates. This should reduce the potential for destabilization of the financial markets from unexpected Fed actions. The destabilizing forces would more likely be surprises in economic data. Link: http://www.reuters.com/article/2014/07/11/usa-fed-plosser-idUSL2N0PM1B220140711