Fisher Investments Editorial Staff
GDP, Monetary Policy, US Economy

Classic Divergence

By, 12/15/2010
 

Story Highlights:

  • The Fed's most recent monetary policy statement held the course steady.
  • The Fed grudgingly admits the economy is recovering but continues to downplay progress and blames "constrained" consumption on unemployment.
  • But real consumption, nominal consumption, and November retail sales are all at or past pre-recession peaks.
  • The prevailing "economic story" remains gloomy, but the less sentimental tale is one of consistent recovery verging on renewed expansion. 

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The Fed's monetary policy statement released Tuesday was little changed, again noting the Fed is generally underwhelmed with the pace of economic growth and employment gains. The central bank will hold its target interest rate at 0-0.25% and continue the previously announced $600 billion round of quantitative easing (QE2).  

The Fed grudgingly admits the economy is recovering but continues to downplay progress and blames "constrained" consumption on unemployment. No surprise there. Unemployment is their prime rationale for QE2 and unarguably high. But what about "constrained" consumption? It's a story that passes for truth the more it's parroted—yet is an assessment far too grim.   

The personal consumption component of real GDP regained pre-recession levels (just 0.02% below its Q4 2007 peak) in Q3. Nominal personal consumption surpassed its pre-recession peak in Q1. And Tuesday, the Commerce Department confirmed retail spending hit its pre-recession peak in November. That news might surprise a few folks—it goes virtually unreported in major publications. Instead, we're inundated with claims consumption is "constrained," anemic, and depressed.

So why the discrepancy? It's a matter of defining terms. The Fed, for example, must know we've made up lost ground. They're not concerned with the consumer spending "recovery"—which is complete by all accounts—but the rate of consumer spending growth. Slippery territory. How do you define "acceptable" economic growth rates? How do you safely attain them? Clearly, the rate of recovery has been consistently strong enough to deliver us to expansion's doorstep. 
 

We don't think the Fed's latest quantitative foray is all that dangerous at the moment. As they rightly point out, inflation and capacity utilization remain low and unemployment high. But neither do we believe it'll do much for the economy that the economy isn't already doing for itself. Even after a significant rally from the 2009 bear market bottom, investors are fearful, deflated, and disheartened. That general lack of confidence extends all the way to the central bank. Yet, the less sentimental tale is one of consistent recovery verging on renewed expansion—a classic bull market divergence and solid reason to own stocks as dour sentiment gradually converges with a more positive reality.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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