Fisher Investments Editorial Staff
Monetary Policy, US Economy

Lowering the Economic Bar

By, 07/22/2010

Story Highlights:

  • Fed Chief Ben Bernanke's latest testimony before Congress revealed a somewhat weaker (though still positive) outlook for US economic growth.
  • Stocks were in the red for the day following Bernanke's speech, perhaps weighed down by the lower growth expectations, including expectations for prolonged elevated unemployment.
  • Perhaps investors were also hoping the Fed would offer additional stimulus measures—but nothing was mentioned.
  • Central bankers are not infallible when making economic predictions—and it's not unusual for them to be conservative in their views.
  • The factors cited as risks to the economy in Bernanke's speech are nothing new and include areas of the economy that turn around more slowly.

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Have you ever gone to the movies with no expectations only to be blown away by the film? Had the bar been set higher, the enjoyable movie may have disappointed in some way. Investing is similar—changing expectations can have a big impact on stock prices. So it's understandable stocks sold off a bit Wednesday after Fed Chairman Ben Bernanke tempered his views on US economic growth in his latest testimony before Congress—there's much to be said about managing expectations, especially when there is uncertainty. 

Bernanke's testimony didn't offer much new, but revealed a somewhat weaker (though still nicely positive) outlook for US economic growth. Fed officials expect the economy to expand between 3% and 3.5% for 2010 (down only slightly from their previous forecast of 3.2% to 3.7%), with growth higher in 2011 and 2012 and tame inflation. 

Stocks were in the red for the day following Bernanke's speech, perhaps weighed down by the lower growth expectations, including expectations for slower employment improvement. Bernanke noted the current pace of jobs being added will not bring down high unemployment anytime soon, which is expected by Fed officials to be elevated above 7% through 2012. Bernanke also pointed out risks stemming from Europe, specifically sovereign debt problems making financial conditions less supportive of growth.  

Perhaps investors were also hoping the Fed would offer additional stimulus through quantitative or other easing measures. Bernanke was clear the Fed stands ready with stimulus if the economy falters, but feels the already exceptionally accommodative monetary stance is sufficient to support growth. Moreover, Bernanke assured the historically low short-term rates will remain in place for an extended period and projected rising demand from households and businesses should help sustain growth once fiscal spending slows.  

Bernanke's message wasn't entirely morose. US economic recovery is expected to continue, the US banking system is significantly more sound, the Fed sees little risk of a double-dip recession, and commercial real estate issues shouldn't hamper the US economy or banking system. Additionally, Bernanke highlighted strength in business and consumer spending (especially on durable goods—an area hit particularly hard during the economic downturn) in the first half of the year. Notably, despite fears of high unemployment dragging on household spending, consumers are proving resilient—spending rose at a real annualized rate of 2.5% for the first half of 2010. Lending to small businesses—a current area of focus for the Fed according to Ben—also improved, though a few restrictive factors remain. 

Keep in mind a Fed chief, or any other central banker, is not infallible when making economic predictions. Plus, it's not unusual for them to be conservative in their views—there's not much to be gained by unbridled optimism. But if they err on the side of caution and the world turns out better than expected, they come off as careful stewards of monetary policy. After all, Fed chairmen are dependent on presidential appointment, making them inherently political creatures.  

The factors cited as risks to the economy in Bernanke's speech are nothing new and include areas of the economy that turn around more slowly (employment and housing), but the positive factors we see today (booming global trade, falling trade barriers, healthy corporate balance sheets, increasing business spending, Emerging Markets growth, dramatic improvements in corporate earnings, and others) remain firmly in place to drive US and global growth.

 

*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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