Last week provided fresh evidence of the impotence of monetary policy in promoting growth in a low inflation environment. While the Fed's two-day meeting ended with no expectation of further quantitative easing, Friday's GDP report, featuring weaker-than-expected readings on investment spending, reinforced just how powerless the Fed has proven in promoting economic growth through unconventional means. In theory, if easy money was going to promote growth, the sectors that would benefit the most would be home-building and business investment spending. In practice, an easy money policy has made it difficult for lenders to expand long-term lending prudently, while the dismal assurances that economic conditions will warrant low rates going for a long time to come has simultaneously undermined economic confidence while removing any incentive for borrowers to take advantage of low rates before they rise.
Similarly, in Japan, further unconventional measures announced by the BOJ last week, including the purchases of more long-term government bonds and some equities still leaves the nation far from achieving the BOJ's very modest goal of a 1% inflation, a reality which was highlighted by last week's data showing negative year-over-year inflation, ex-food and energy for both the nation as a whole in March and Tokyo in April.
This week could provide evidence of the limits of fiscal policy as a second round of French voting is expected to elect socialist Francois Hollande to the Presidency, partly in a backlash against fiscal austerity. Greece also holds elections this week and while the vagaries of Greek proportional representations suggest that the center-right New Democracy party will lead the next government, the anger of the public at austerity measures should be manifest.
Throughout the developed world there is a long-term need for smaller government and balanced budgets. However, deficit reduction in the teeth of recession is a recipe that never works well. Indeed the twin policies of fiscal restraint and monetary largesse are a significant impediment to a healthy recovery in the economies of the developed world.
While this medical cocktail is probably making the patient sicker rather than healthier, luckily the dosage in the United States is fairly modest right now, with QE3 off the table, at least for now and only a modest 1% reduction expected in the deficit-to-GDP ratio in the current year.
Reflecting this, U.S. economic numbers this week should look paint a picture of moderate growth. Consumer Spending likely grew at a healthy pace in March, especially outside of the auto sector while the ISM indices for both the Manufacturing and Non-Manufacturing sectors should have remained well in expansion territory in April. Industry reports suggest a flattish number for Light-Vehicle Sales on Tuesday while Unemployment Claims may begin to edge down following a recent surge. Productivity numbers due out on Thursday will be weak as the first quarter, like the fourth, was more impressive from the perspective of employment growth than output. Still employment growth is crucial to consumer, business and investor confidence and Friday's Jobs report may reveal better numbers for April than were seen in a rather disappointing report for March.
Overall, while developed economies are seeing only faltering growth, the pace of recovery seems a bit better in the United States. This being the case, very conservatively positioned investors may still want to consider being more balanced by increasing their exposure to equities relative to bonds.
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Tuesday, May 1st
ISM Manufacturing Survey Forecast Last
Index Level 52.6 53.4
Light Vehicle Sales Forecast Last
Millions of Units, Ann. Rate 14.4 14.3
Thursday, May 3rd
Jobless Claims Forecast Last
Initial Claims, 000's 375 388
Continued Claims, 000's 3,250 3,315
Productivity – Non-Farm Bus. Forecast Last
Output per Hour, %ch, ann rate - 0.4% 0.9%
ISM Non-Manufacturing Survey Forecast Last
Production Index Level 58.1 58.9
Friday, May 4th
Employment Forecast Last
Total Payroll Jobs, chg, thousands 162 120
Private Payroll Jobs, chg, thousands 159 121
Unemployment rate, % 8.1% 8.3%
Avg Workweek, prod wkrs, hours 33.8 33.8
Avg Hourly Earnings, prod wkrs,%ch 0.2% 0.2%
David Kelly is the chief market strategist for JPMorgan Funds.
