Economy growing, but unemployment still high
The end of last month featured relatively light trading volumes in advance of the unofficial end of summer.
Highlights included Federal Reserve chairman Ben Bernanke’s much-anticipated Jackson Hole speech, in which he confirmed that the Fed still has some options in terms of easing monetary policy, as well as an upward revision to second-quarter GDP growth from 1.5 per cent to 1.7 per cent.
In spite of a rally on the last day of August when Mr Bernanke delivered his speech, stocks closed the week slightly in the red, with the Dow Jones Industrial Average dropping 0.5 per cent to 13,090, the S&P 500 index falling 0.3 per cent to 1,406 and the Nasdaq Composite losing a fractional amount to 3,066.
As the GDP revision confirmed, the US economy is still growing, but not at a quick enough pace to bring down the unemployment rate. We have been seeing signs of improved business investment levels, increases in consumer spending and a recovery in the housing market, but the labour market remains troubled and the recent rise in energy prices will weigh on sentiment and spending levels.
Additionally, uncertainty over fiscal policy is acting as a drag on the economy. In our view, economic growth is likely to remain modest over the course of 2012 and into 2013 and we continue to expect GDP to grow at approximately the 2 per cent level.
It was with this backdrop that Mr Bernanke delivered his address at the annual policy symposium at Jackson Hole. In his speech, he defended the effectiveness of unconventional monetary policies and provided a hint that more easing from the Fed may be forthcoming. The implication of his speech was that there may be a third round of quantitative easing in the offing, possibly one that consists of additional purchases of treasuries and mortgage-backed securities.
It is also possible that the Fed could extend the forecast period over which it says interest rates will remain close to zero. This period is currently due to elapse in 2014. Should the Fed follow through with possible new easing measures, we believe they would provide a boost to the economy but would not materially alter our 2 per cent growth forecast.
In addition to debates over monetary policy, fiscal issues remain in the headlines. At present, the consensus expectation is that politicians in the US will attempt to hammer out some sort of fiscal policy agreement after the November elections.
Although the sides remain far apart and statesmanship is sorely lacking in Washington DC, we still think there is a better-than-50 per cent chance that we’ll see an 11th or 12th-hour agreement to enact a temporary extension of the Bush-era tax cuts and a delay in scheduled spending cuts, with real and hopefully long-term action being taken in early 2013.