The Federal Reserve’s Open Market Committee, chaired by Janet Yellen, will be meeting mid-month to decide whether or not to zip up its ZIRP (zero interest-rate policy) and hike the fed funds rate, finally.
My expectation: No hike, but a cacophony of headlines and hand-wringing. Hike or no hike, as always, I recommend tuning out the noise.
Aside from the constant speculation about the Fed’s next move, here are other issues to know about the current economic climate:
Greece
May started out with worries about Greece and worries that our own markets had topped out and would succumb to the purported historical record of leading off a lousy six months.
Then, the Greeks paid off one debt, meeting a deadline by essentially borrowing from another pot of money that will need to be refilled at some point, and our markets began hitting records again. Economic news came in light, and then came in with it a bit more oomph.
Greece is now a worry again, the Chinese have sold off some banks (and Shanghai’s market took a huge dive late last week), and, well, we found out in the first revision to GDP that it actually contracted by 0.7%.
Consumer Confidence
Last week gave us yet another data point that leads me to really think hard about whether two major measures of consumer confidence really tell us anything. The Conference Board’s consumer confidence index and the University of Michigan’s consumer sentiment index continue to tell very different tales.
In April, confidence, which is how a consumer might feel about buying something in six months, was down 7% from the prior month. On the other hand, consumer sentiment, which measures how consumers might feel about buying something today, was up 3.1%. Then, in May, the numbers reversed — sentiment was down and confidence was up.
And lest you think that this simply reflects a one-month lag between the two indicators, that’s simply not the case. Over the past six months, for instance, confidence is down 5.2% while sentiment is flat. Over the last year, confidence is up 16.1%. Sentiment is up half as much — 8.2%.
Can you make heads or tails of this stuff? I can’t. But I can tell you that the consumer seems to be holding back on spending right now, despite having gotten a big shot in the savings account from dramatically lower fuel costs.
Whether that will begin to translate into more spending in the coming months is the $64,000 question when it comes to improving economic fundamentals. Certainly the past month’s durable goods orders report was nothing to take to the bank, but at least it’s a bit more relevant and contained glimmers of hope. Consumer confidence or sentiment, take your pick — or don’t.
Banks
Speaking of banks, commercial and industrial loans are booming. The banks are happy to make the loans, and businesses are happy to take them. On the face of it, that would be a huge positive. But what are companies borrowing for? Is it expansion or share buybacks and dividends? Or are they simply borrowing because rates are low, and they can?
I realize that a company can’t go to the bank and borrow simply to pay a dividend, but given all the shenanigans companies can play these days with their money, I have to wonder where all this borrowing is going.
Oh, and by the way, according to an article in The Wall Street Journal last week, spending on buybacks and dividends is growing while spending on new factories and R&D is not. Hmmm.
Home Sales
Again, a bit of an up and down on the economic front: New home sales data surprised on the upside with a huge year-over-year gain in the numbers and a decent rise in the median price (though not nearly as high as it’s been in the past).
At about 10% of the existing homes market, this is a good signal, but not nearly as good as if we saw these kinds of numbers applied to the millions of existing homes that are traded each year. And those existing home sales numbers have not been stunners of late. So, there’s more to go there.
Editor Dan Wiener and Research Director Jeffrey DeMaso publish The Independent Adviser for Vanguard Investors, an award-winning monthly advisory letter that keeps subscribers abreast of recent developments at Vanguard, and provides long-term guidance for investing in the Vanguard fund family.
