The latest inflation number has been quite low at an annual pace of 1.2 percent, but it’s a lagging indicator and will probably keep the Fed on hold for longer, meaning bond proxies and income orientation that has worked well thus far will continue to do so in future, said David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates.
The Fed will probably continue with very low interest rates at least over the course of the next several months, but the reality is that the economy remains very soft considering everything that we have going for us, he noted. Suddenly, all the expectations for a three percent plus growth become 2 ½ percent. It’s fascinating to observe that if China grows three-tenths below consensus at 7.7 percent, headlines scream its economy is falling apart. But if the US misses the target by half-a-point, (people say) “don’t worry, we’re still expanding,” David quipped.
The reality is that the first quarter is history though there will be some revisions. If we look at the second quarter, we will see two-thirds of economic indicators last month have come-in below consensus. The economy is entering the second quarter with very little momentum and whatever (momentum) we had in the first quarter, it’s going to be significantly lower in the second quarter, David added.
The economy is yet to witness three-percent or better growth in two back-to-back quarters. The overriding story is that we had a real choppy pattern to GDP growth and there has been no acceleration. The economy is basically stagnating at around the trend growth of 1.5 percent, he noted. The growth rate has been unexpectedly lower though there’s no doubt that the economy is in a recovery, he added.
The significant reduction in government and defense spending impacted growth in the past two quarters. Asked if sequester could impact the rest of the year, David said the effect will be lower since the budget cuts are coming down the pike. The sequential effects are going to dissipate over the next quarters.
At the same time, the contribution of housing will also diminish because we already had a major acceleration. The two critical issues for the rest of the year will be the effect of interest rates on US consumer spending and the impact of weak global demand on US exports, he concluded.
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