Slow but Steady

Having the government operate on continuing resolutions helped bring us to the brink of the Fiscal Cliff and is a reason behind the sequestration. So while the provisions of the President’s recently released federal budget may be controversial, it brings both parties back to the bargaining table. Hopefully the break in budget discussions allowed participants to think of ways to make meaningful changes rather than temporary bandages.

Speaking of bandages, on the same day the President released his budget the FOMC announced it would be willing to stop QE and operation twist by the end of the year. Of course, this could be meant to discourage other countries from continued currency devaluation, but it also indicates strength in the private sector.

Cash on corporate balance sheets dropped from around 32% to roughly 28% mostly due to M&A activity and an increase in other capital expenditures. This type of corporate spending signals that businesses are optimistic about future earnings even though retail figures in March were lower than expected. One way to improve sales figures is to increase the dividend payout ratio from historic lows, but the consumer balance sheet may not need the excess cash.


The consumer balance sheet, with liabilities roughly 17% of assets and mostly in fixed rate obligations, illustrates continued caution for the near term but building wealth for the long term. As home valuations increase with a rise in new housing starts, which are just getting back to historic averages, a buildup of consumer wealth will likely accelerate. However things aren’t all rosy. Persistent problems with income inequality and un/underemployment continue to make headlines, but domestic issues are only part of the story.


Europe seems to be stuck on repeat but with different musicians playing the same song. Last summer Greece, Spain, and Portugal dominated the news; last month Cyprus ran into issues, and now France is beginning to take the lead. The positive is that Europe is quickly learning how interconnected its economies truly are. The bad news is that until meaningful changes are made policies will continue to test the resolve of the finance ministers to “do whatever it takes.”


The changes in China are a good example of doing whatever if takes. In the past year China swapped its government while simultaneously furthering the switch from a capital intensive economy to a service based one. There was a brief hiccup but appropriate changes were made, and despite increased concern over inflation the economy is showing signs of stable growth. Other emerging economies are showing similar patterns as they continue to focus on internal development while waiting for a global economic rebound.


Overall, we expect modest but slower growth in the US and abroad over the next couple of months with stronger numbers towards the end of the year. Austerity measures and global inflation concerns may affect our projections but both governmental and private economic drivers have proven to be resilient.

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