Mixed signals—that’s the only term to describe it. As the calendar turned into a New Year, signs looked promising that the economy was beginning to gain strength—to finally reach the point it does not require monetary stimulus. Then, the Friday jobs report, which Mohammed El-Erian of Pimco called ‘strange and puzzling’, created doubt about the strength of the economy’s momentum.
This week we examine these mixed signals. The first article, by Liz Ann Sonders, Chief Investment Strategist of Charles Schwab & Co., reflects the optimism of apparent economic momentum entering the New Year. Her viewpoint is matched by other leading economists, like Martin Feldstein, President Reagan’s economic advisor, and Janet Yellen, recently confirmed head of the Federal Reserve. Finally, Mohamed El-Erian comments on Friday’s jobs report.
Turn the Page: Outlook for Economy/Stocks in 2014. Liz Ann Sonders, Chief Investment Strategist at Charles Schwab & Co., expects for 2014 “an acceleration in economic growth, led by a fading of fiscal drag—meaning government will no longer pull down gross domestic product (GDP)—as well as continued strength in housing and a pick-up in business capital spending (which correlates well with job growth). In fact, the economy could finally reach ‘escape velocity’—meaning the recovery moves definitely into expansion and doesn’t require excess monetary stimulus. Instead, it is powered by consumer spending, business investment, housing and job growth. We also think political and Fed uncertainty will fade this year; barring a jolt of the unexpected by either.”
Economists anticipate accelerating U.S. Growth. Economists and former policymakers also are predicting that the pace of U.S. economic growth will pick up this year. “2014 is going to be a better year,” said Martin Feldstein, a Harvard University professor and a Council of Economic Advisers chairman under President Ronald Reagan. “There is no reason for pessimism about our near future if we adopt appropriate policies.” Former U.S. Treasury Secretary Lawrence Summers and John Taylor of Stanford University also agreed in interviews that stronger growth is possible.
New Head of Federal Reserve hopeful for 3 percent GDP growth in 2014. Janet Yellen, who is set to take over as head of the Federal Reserve from Ben Bernanke, also is “hopeful” that U.S. economic growth will accelerate in 2014 to 3 percent or more. “The recovery has been frustratingly slow, but we’re making progress in getting people back to work…I expect it (the housing market) to pick back up and I do expect a further recovery.”
Jobs report somewhere between puzzling and worrisome. Mohammed El-Erian of Pimco comments on Friday’s job report in a video interview by saying the report is surprising…“such a strange number—78,000 jobs created, half of consensus estimate. Though the unemployment rate dropped to 6.7% and labor participation fell to the lowest since February, 1978….we still need to learn more. It is a shocker. It reflects an economy still trying to gain momentum…it reminds markets the taper will continue, but the Fed is unlikely to hike rates in 2015, more likely in 2016.”
And in case you missed it, click here to read last week’s blog post which focuses on the change in monetary policy by the Federal Reserve.
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J. Mark Nickell & Co.
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