Today's Headlines: Fed Stays the Course

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Today's Headlines: Fed Stays the Course
May 6, 2014

Stagnant GDP Shrugged Off; Fed Stays the Course

Two events that typically influence the stock market took place this week – the Commerce Department’s Bureau of Economic Analysis (BEA) released the first estimate of 2014 1st quarter U.S. GDP, and the Federal Reserve meeting concluded with a continued scale-back of their bond-buying stimulus program.

So far, economists and the stock market experts have replied with a giant "meh". Stocks continued their general trends, and economists blamed the meager 0.1% rise in GDP on the severe winter weather.

In many respects, that is a reasonable assumption, but there are some disturbing signs that cannot be explained by weather, such as the trade imbalance. Imports sank by $8.8 billion, but exports plummeted by $40.5 billion.

Note that this is an advance GDP estimate. The second estimate from BEA will be out on May 29th.

As for the Fed, they stuck with their scheduled $10 billion reduction in bond purchases. Wall Street has been unsettled by Janet Yellen's decoupling of the stimulus program from the unemployment rate, since Ben Bernanke provided a more predictable guide for the Fed's actions. Still flexibility has benefits – what would Bernanke have done with the recent jobs report (see below)?

Collectively, there seems to be agreement that the economy is growing, albeit slowly. Even Warren Buffett agreed that the economy is improving, and who wants to argue with him?

Slow growth and the steady-as-she-goes Fed policy will likely keep interest rates on a very slow climb and keep more radical influences in check for a while – so if you are trying to enter the home market, you probably have a little more time to gather up down payment money and lock in a relatively low fixed rate.

Do not wait too long, or you could miss out on rates that are still relatively low in historical perspective. This is an unusually high-stakes, non-presidential election year, so bad knee-jerk economic policy is a distinct possibility.

While it seems unlikely, watch the May 29th BEA report for any significant corrections that may upset the market for stocks, or the Fed for interest rates.

Jobs Report Mixed

Initial glee at the recent jobs report from the Bureau of Labor and Statistics was tempered upon deeper analysis.

On the positive side, 288,000 jobs were created in April – which was the largest monthly gain since January 2012 -- and lackluster February and March numbers were revised upward by 36,000 total jobs. The growth was spread across sectors, indicating a general upswing.

On the positive-at-first-glance side, the unemployment rate dropped to 6.3% – a surprisingly good number, until you realize it was driven by a massive flow of people exiting the labor force. 806,000 people left the workforce, neutralizing gains from previous months. (Perhaps it's good that the Fed decoupled their policy from pure unemployment rates.)

If you are currently out of work or underemployed, that may be good news – fewer people are in the job market for an increasing number of jobs.

Assuming job growth continues at this pace (238,000/month average so far in 2014), it will be interesting to see if there is a disproportionate re-entry into the labor force, or if this is a one-time permanent adjustment. At least one economist connects this to the lapse of extended unemployment benefits in early 2014 – without benefits that require job hunting, the long-term unemployed may have just given up.

With stagnant wages and a labor force shrinking for the wrong reasons, the Fed is likely to keep interest rates low as a stimulus. As mentioned earlier, you should still have time to take advantage.

For more of the latest economic news on home sales and corporate earnings, see Mixed Economic Results - Poor Home Sales and Strong Corporate Earnings.
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