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
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