Let There be Light...at the End of the Tunnel

by Anirban Basu 24. January 2014

Anirban Basu

The U.S. economy had been stuck at 2 percent growth for several years and throughout much of 2013. Imagine a sports car with incredible get up and go, but one that had to constantly negotiate a series of speed bumps that permit it to only travel between 30 and 40 miles per hour. To complete the analogy, that translates into sub-par economic growth and an unemployment rate still hovering around 7 percent after more than 4 years of economic recovery.

However, the outlook for 2014 is as positive as it has been for any year since the onset of the financial crisis. There are a number of relevant factors at play. The world economy is now strengthening, with accelerating growth apparent in China, parts of Europe, the U.S., and in a host of emerging nations. Accordingly, the International Monetary Fund projects that the global economy will expand 3.6 percent in 2014 after expanding closer to 3 percent in 2013.

There are other tailwinds that more specifically impact the U.S. economy. The nation now enjoys greater certainty regarding its federal budgetary and Federal Reserve monetary policies. Seemingly against all odds, the federal government recently passed a budget that guides spending into 2015. On December 18th of last year, the Federal Reserve announced that it would begin to taper its bond purchase program beginning in January. Rather than purchasing $85 billion each month in assets, the Federal Reserve will taper its purchases to $75 billion per month. Specifically, the FOMC will reduce its purchases of Treasuries and mortgage-backed securities to $40 billion and $35 billion per month.

Equity investors cheered the policy announcement for at least three reasons. First, the Federal Reserve introduced language suggesting that short-term rates will remain low for many quarters to come. The announcement also reduces the level of policy uncertainty, and markets don’t like uncertainty. Finally, the decision to taper implies that the Federal Reserve’s forecast for U.S. economic activity has improved since its September 2013 meeting.

There’s more at work than policy shifts. Gas prices have fallen, helping to increase consumer disposable spending power. Corporate performance remains solid. A majority of large U.S. corporations beat their earnings estimates during last year’s third quarter. However, a materially smaller share beat their revenue estimates, implying that companies continue to aggressively manage costs to boost bottom line performance. With economic growth now accelerating both nationally and globally, corporate America may have an opportunity to rapidly expand both their respective bottom and top lines.

The stock market has simply boomed as a result of the confluence of many factors, with the S&P 500 surging nearly 30 percent in 2013. While 2014 is unlikely to generate anything close to that return, the stock market’s performance has added both capital and confidence to the U.S. economy, which in turn creates a better environment for the broader market.

In general, regions of the nation enjoying the fastest recovery are those that are associated with rapidly rising populations (e.g., Texas, Florida), surges in energy production (North Dakota, Texas, Louisiana), increased industrial output (Indiana, South Carolina) and rapidly recovering housing markets (Florida, Georgia, Arizona). These regions are likely to continue to expand more rapidly in 2014.

Will Maryland Catch the Tailwinds?

Maryland was a willing participant in the nationwide recovery and continued to post solid economic performance numbers throughout 2013. For instance, between November 2012 and November 2013, the state added 33,500 jobs or 1.3 percent according to the Bureau of Labor Statistics. The State ranked 28th in the nation with respect to year-over-year percentage job growth over that period, down from 22nd in May of 2013. Despite the dip in relative job growth, the Free State ranked ahead of Virginia. Statewide aggregate employment has now surpassed its December 2007 level, the month during which the Great Recession began.

Despite a promising outlook for the global and national economies, there is cause for concern in Maryland. Like a facemask-wearing stalker in a 1980s horror movie, the State’s structural deficit refuses to permanently disappear. What was once estimated to be a $300 million surplus for FY2014 is now an $87 million deficit. The budgetary gap rises to $400 million for FY2015. It is critical that Annapolis resolve these shortfalls without further impacting the state’s business climate and reputation.

Moreover, Maryland does not fully participate in many of the economic segments that are likely to drive the U.S. economy forward in 2014, including industrial and energy production. As a wealthy state, Maryland does benefit from disproportionate impetus from stock market-induced wealth effects, however. It also helps that sequestration has been relaxed a bit. The distribution, medical research and financial service intensive Baltimore metropolitan area has arguably been the healthiest economic region within Maryland of late in terms of pace of recovery.

Anirban Basu is Chairman & CEO of Sage Policy Group, Inc., an economic and policy consulting firm in Baltimore, Maryland. Basu is one of the Mid-Atlantic region's most recognizable economists, in part because of his consulting work on behalf of numerous clients, including prominent developers, bankers, brokerage houses, energy suppliers and law firms. On behalf of government agencies and non-profit organizations, Basu has written several high-profile economic development strategies, including co-authoring Baltimore City's economic growth strategy. His opinions do not necessarily reflect the opinions and beliefs of 1st Mariner Bank.

Unrealized Potential: A Glance at Our Economy

by Anirban Basu 21. October 2013

Anirban Basu

Despite a growth rate that has averaged more than 3 percent over the past 25 years and an unmatched capacity to create and support a host of powerful companies ranging from Google and Coca-Cola to Boeing and Caterpillar, the U.S. economy has been stuck at 2 percent growth for several years. Imagine a sports car with incredible get up and go that has had to continuously negotiate a series of speed bumps. Economically, these take the form of higher tax rates, sequestration, rising interest rates, a recently resolved federal shut down, and the uncertainties associated with healthcare reform. The upshot – 2013 will go down as yet another disappointing year for the U.S. economy.

While the government reached a deal to reopen the government, the 16-day shutdown and a standoff regarding the federal debt limit, cost the nation’s economy $24 billion according to an S&P estimate. Furthermore, according to the Conference Board, the economy is set to expand at just 1.7 percent on an annualized basis during the fourth quarter. In other words, the economy may not be entering 2014 with much momentum.

U.S. equity markets, however, have generally continued to surge higher. As of October 10, 2013, the Dow was up nearly five percent since the onset of the third quarter and up nearly 16 percent year-to-date. The Nasdaq Composite was up nearly 21 percent year-to-date as of October 10th, which happened to be 10 days into the federal government shutdown.

The rebound in equity markets is attributable to numerous factors. One is a still expanding, though somewhat disappointing U.S. economy. Corporate profitability and ongoing injections of liquidity into the economy by the U.S. Federal Reserve have also contributed to appreciating share prices.

Of course, Federal Reserve policy influences more than stock prices. Consumers have leveraged low interest rates, including through the purchase of new cars and light trucks. Sales of new vehicles in the U.S. are on pace to exceed 15 million in 2013.

The Federal Reserve will continue to focus on accelerating economic growth as long as inflation remains tame. For now, inflation is not a major issues. Consumer prices rose just 0.1 percent in August after climbing a similarly benign 0.2 percent in July. Despite large jumps in February and June (0.7 and 0.5 percent, respectively), trend inflation remains well within the Federal Reserve’s comfort zone.

Labor market performance remains mixed. While it is true that unemployment fell to 7.3 percent in August, the lowest rate recorded since December 2008, the decline was primarily attributable to the 312,000 people who left the labor force. Only 63.2 percent of Americans presently participate in the labor force, the lowest proportion since August 1978.

Maryland's economy added 43,300 jobs or 1.7 percent to aggregate nonfarm payrolls. Because Maryland is a wealthy state, it is likely that consumers here benefit more on average from the stock market’s rally. This may help explain some of the state’s demonstrated capacity to withstand federally-induced headwinds. According to the most recently available data, statewide nonfarm employment stands at 2,616,200 jobs, a record high.

Looking Ahead

As of this writing, America’s government has been reopened for less than 24 hours. Although the nation was not foolish enough to tempt fate through default, the government could again close on January 15th, less than three months from now. This means that Washington, D.C. will continue to be a source of fixation and uncertainty among the nation’s business decision-makers. That uncertainly will likely prevent the economy from accelerating to 3 percent growth next year. Another 2 percent year is quite possible.

Anirban Basu, Economist, Sage Policy Group, Inc. & First Mariner Bank Board Member

Anirban Basu is Chairman & CEO of Sage Policy Group, Inc., an economic and policy consulting firm in Baltimore, Maryland. Basu is one of the Mid-Atlantic region's most recognizable economists, in part because of his consulting work on behalf of numerous clients, including prominent developers, bankers, brokerage houses, energy suppliers and law firms. On behalf of government agencies and non-profit organizations, Basu has written several high-profile economic development strategies, including co-authoring Baltimore City's economic growth strategy. His opinions do not necessarily reflect the opinions and beliefs of 1st Mariner Bank.

Record Low Mortgage Rates a Thing of the Past

by Anirban Basu 19. August 2013

Anirban BAsu

It was only a Matter of Time

We knew they wouldn’t last forever. An extraordinary confluence of circumstances, including a deep recession, deflationary forces and hyper-aggressive monetary policy, produced the lowest mortgage rates in history. As of July of last year, interest rates on benchmark 30-year fixed-rate loans were hovering around 3.5 percent, sometimes lower. They bottomed out at the end of November, when rates hit an unheard of 3.31 percent according to the Freddie Mac Primary Mortgage Market Survey. Until the last few weeks, these rates had managed to remain below 4 percent despite ongoing economic recovery.

But the mere possibility of slower bond purchases by the Federal Reserve produced a surge in mortgage rates. Recently, these rates have been in excess of 4.5 percent, a level that hasn’t been observed in over two years. As pointed out by MoneyWatch and other publications, at the end of June, rates leapt nearly 0.5 percent, producing the largest week-over-week increases in more than a quarter century. Many economists viewed the bond market’s reaction to possible Federal Reserve policy shifts as overdone, but rates have not declined significantly since their initial surge.

For those who prefer to view the glass as half-full, the rise in mortgage rates is to a large extent the product of better economic news. The nation is now in its fifth year of economic recovery. It has added more than 2.2 million jobs over the past year, including nearly 200,000 in construction.

Improvement in the housing market has taken center stage. Since the final quarter of 2011, advances in homebuilding have been responsible for roughly a fifth of total economic expansion. As a result of improvements in homebuilding and remodeling, housing’s overall share of the economy is gradually climbing back toward historic norms.

Correspondingly, the housing sector, which led the economy into recession in late-2007 and into near financial collapse in September 2008, no longer needs as much monetary policy support as it once did. Home prices are now rising, creating a level of urgency among prospective buyers that did not exist during earlier stages of the economic recovery.

According to the S&P/Case-Shiller Index, a leading measure of U.S. home prices, average prices rose 11.6 percent and 12.1 percent for the 10- and 20-City Composite indices for the 12 months ending in April 2013. Atlanta, Dallas, Detroit and Minneapolis posted their largest annual gains since the inception of these indices. Atlanta, Las Vegas, Phoenix and San Francisco generated year-over-year gains exceeding 20 percent.

In Maryland, median sales prices are up 5.9 percent over the past year (June 2012 versus June 2013) and average sales prices are up 4.3 percent. Unit sales are up 13.1 percent.

Looking Ahead

It is quite possible of course that the recent rise in mortgage rates will slow progress in the housing market going forward. Already, there has been major impact in the market for mortgage refinancing, with refinancing demand recently slipping to a 2-year low.

To date, loan applications for home purchases have not been as significantly impacted. With mortgage rates having risen, some prospective purchasers have undoubtedly reconsidered their selection of mortgage product, with more opting for adjustable rate mortgages than would have had rates remained unchanged. That flexibility allows would-be buyers to continue to benefit from ultra-low rates even in a rising rate environment. Moreover, the latest data continue to indicate rising home prices, which means that the motivation to purchase and enjoy future appreciation still remains.

Anirban Basu, Economist, Sage Policy Group, Inc. & First Mariner Bank Board Member

Anirban Basu is Chairman & CEO of Sage Policy Group, Inc., an economic and policy consulting firm in Baltimore, Maryland. Basu is one of the Mid-Atlantic region's most recognizable economists, in part because of his consulting work on behalf of numerous clients, including prominent developers, bankers, brokerage houses, energy suppliers and law firms. On behalf of government agencies and non-profit organizations, Basu has written several high-profile economic development strategies, including co-authoring Baltimore City's economic growth strategy. His opinions do not necessarily reflect the opinions and beliefs of 1st Mariner Bank.



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