Growth in Homebuilding, Increasing Credit Availability Offset Weak Q1 GDP Growth

By Marcelo Bermúdez, President, Figueroa Capital Group, subsidiary of Charles Dunn Co.

At the end of May, revised GDP reports indicated that the economy actually shrank by 1 percent in the first quarter of 2014. Much of it is contributed to the severe winter the U.S. experienced this year, which means there is more to the story on where the economy is headed. On June 18, Federal Reserve Chairperson, Janet Yellen, will release updated forecasts for important metrics such as unemployment, inflation, economic growth, and indications on where the federal funds rates will be.

GDP has a few flaws, particularly its timeliness – it’s always about a month old. There is also lot of statistical noise it suffers from given that it excludes some relevant data including industrial production surveys and current activities through payroll reports. Currently, unemployment is at 6.3 percent as of May 2014 – a sign of strength compared to the last 24 months. According to the Labor department, inflation continues to show its evidence as it has risen by 1.6 percent over the last 12 months ending in April of this year.

In a July 2012 poll, I was asked to participate in a 2013 Commercial Property Executive article I wrote called “Rates and Confidence Rising.” I predicted we wouldn’t see any meaningful inflation until unemployment crossed the 7 percent threshold. I also discussed QE3 (the third iteration of the Quantitative Easing policy from the Fed) would be open-ended until “improvement is achieved in a context of price stability” (as the government puts it). It seems QE3 has done what it has set out to do. The National Association of Home Builders released their confidence gauge on June 16. It has increased from 45 to 49 in a matter of a month – its biggest gain since July 2013. This is a welcome sign that hopefully will continue to align itself with consumer confidence and job growth. The Fed may do a whole lot of nothing at the moment, but the market will begin to price in statistical probabilities that rates will begin to rise late this year. The hope is Ms. Yellen and her team will give clear signals if they begin to sell off bond holdings in 2016 so employers can make good decisions about growing their companies.

The offensive led by al-Qaeda-related group, Islamic State in Iraq and the Levant (ISIL) continues in the country of Iraq, OPEC’s second-biggest oil producer. This has some pretty large ramifications for energy costs globally, which will affect the bottom lines of all companies engaged in commerce and services. The hope is it won’t generate a ripple effect for the rest of the economy.

The St. Louis Federal reserve recently released data indicating there is approximately just more than $7.6 trillion of loans and leases in bank credit from all commercial banks. That is $1 trillion more than in 2010. Similarly, total revolving credit outstanding, whether owned or securitized by banks, is approaching 2010 levels as well at $870 billion. This is a great indicator to watch if the economy will truly expand as hoped by all.