More Muddling Along
Advisors Capital Management
By Charles Lieberman
June 4, 2012
It appears that economic growth has slowed a bit once again, although a
relapse into recession seems fairly unlikely. Consumer spending,
business investment and a recovery in housing should support growth at a
moderate pace. Europe remains a dark cloud hanging over better
prospects. Budget deficits at the sovereign level and bank capital
needs at the corporate level must be resolved before markets can breathe
easily. This will take time. So volatility in our markets is likely
to continue. Since we can exert very little control over Europe,
policymakers here must remain focused on maintaining growth
domestically.
Job growth has slowed, but remains positive. There is little to blame,
except for the turmoil in Europe. Little more can be done with respect
to monetary policy, which is already very supportive of expansion.
Additional fiscal stimulus is unlikely while the budget remains deeply
in deficit and politicians remain sharply divided. So, it appears the
economy is largely on autopilot until the election and there is
increased clarity with regard to the political landscape.
Economic growth is likely to continue, albeit at a moderate pace. The
turmoil is Europe is also depressing commodity prices, including oil,
which will keep inflation very low. So, modest gains in hiring and
wages can still translate into moderate gains in real disposable income.
Moreover, housing and autos are still very much in a depressed state
that is forcing recovery. Unsold housing inventory has been worked off
and building is gathering momentum. Auto sales have just recently
increased to match the rate at which autos are junked, with no offset as
yet to the decline in the auto fleet over the past four years. And the
low cost of debt finance supports capital investment. These factors
should be sufficient to sustain the moderate growth rate of the economy.
There is not likely to be much in the way of policy initiatives over the
next few months. The Fed has been very creative and forceful with its
stimulative policies, but they have few significant new policy tools
they can unveil. Fiscal policy is very likely to remain dormant until
after the election. Regulatory and other means to stimulate private
spending, without incurring government outlays, are also captive to the
domestic political divide. Perhaps in time, our markets may become
inured to the travails of Europe, but volatility is likely to remain
high until the Europeans are able to repair government and bank balance
sheets. This, too, will take time. So, we muddle along.
(c) Advisors Capital Management
