Second Quarter LSA Economic Update

July 22^nd, 2014

LSA has posted the 2Q14 Economic update report.  Here were some of the high level thoughts:

Our base case continues to be for persistent, moderate growth, which is relatively subdued compared with prior recession recovery periods. This slower growth can be attributed to a variety headwinds including a weak labor market, higher taxes, fiscal sequester issues and the continued threat of higher interest rates. While growth rates continue to be modest, we are seeing signs of improvement, which include lowering unemployment, an improving housing market, falling consumer debt levels, increasing tax revenues, as well as the fact that inflation, interest rates and corporate default rates have all remained relatively low. As has been our stance for some time, we do not expect another recession for the United States.

Due to a subpar economy both in the U.S. and globally, we expect inflation to remain contained (1.5% to 3.0%) over the next 12 months. However, due to stimulus policies created in response to the 2008 financial crisis by the Fed and various central banks around the world, we feel that over the next 3-5 years there is a possibility of higher inflation (12-month CPI change over 3.0%). Over recent periods, CPI numbers in the U.S. have ticked upward, which can largely be attributed to higher food and rent costs. We have also noticed evidence of possible upward wage pressures.

The Fed continued on the path it has been headed down for the last several months, announcing in the June FOMC meeting that starting in July it would be cutting its bond buying program by another $10 billion, bringing its monthly purchases of treasuries and MBS down to $35 billion.  In the FOMC’s June announcement, the Fed noted that they are continuing to see evidence that the U.S. economy is making headway toward the long-term objectives of maximum employment and 2% inflation. At this meeting, the Fed also held close to its view of maintaining low interest rates. We believe it is unlikely that the Fed will rise it’s near-zero short term interest rate target until mid-2015. We predict that interest rates will mostly remain range-bound with an upward bias toward normalization.

In terms of the global economic environment, our outlook varies by region. Despite the U.S. economy’s contraction at the beginning of the year due to inclement weather conditions that arose across some of the larger parts of the country, we believe the U.S. has achieved persistent, albeit, modest growth. Europe, which has been staggered for several periods by the European debt crisis, seems to finally be stabilizing although deflation and unemployment are still concerns within the region. Asia is a mixed bag with the verdict still being out on the impact of China’s reform program, as well as questions surrounding Japan and how it will recover from the recent national sales tax hike that was implemented in April to help the country reduce its massive national debt.  To review this report simply log in to the LSA website and click on “Resources/Articles”.  If you are not a member but would like to review the report e-mail us at support@lsaportfolios.com .