No QE3 as Economy Creeps Along

VIDEO: Morningstar's Bob Johnson doesn't expect another round of quantitative easing as the economy continues to grow slowly

Jeremy Glaser 26 August, 2011 | 10:15AM
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Jeremy Glaser: For Morningstar, I am Jeremy Glaser. All eyes this week are on the Federal Reserve and Ben Bernanke's speech at Jackson Hole, Wyo., to see what the future of Fed policy will be. I’m here today with Bob Johnson. He is the director of economic analysis for Morningstar. We’ll take a look at what some of the Fed’s options are and some of the economic data that the Fed might be considering.

Bob thanks for joining me today.

Bob Johnson: Great to be here.

Glaser: Let's first start off by talking about Bernanke’s speech at Jackson Hole on Friday. This was the speech that last year he really set the stage for the second round of quantitative easing, and there is a lot discussion as if a third round is possible, if it's a good idea, and if it's something that he is going to discuss or not. What do you think he'll talk about in the speech?

Johnson: I'm certainly not looking for QE3, and I think he’ll try to lend some support to the economy. Maybe he’ll lengthen the maturities of some bonds in their portfolio; maybe he'll say, "we're hopeful for better results in the future" or "we’ll keep a close eye on it and monitor the situation." But I don't expect him to announce a big QE3-type of programme. It just doesn't seem in the cards. Two weeks ago, he kind of really made the big announcement of keeping rates at where they are today until 2013, and it would seem bad or wrong to kind of two weeks later, to say, "Well that didn’t work, so now we're going to introduce QE3 here."

It just doesn't seem like the most likely case to me. He certainly didn't even have all the governors onboard for the last move. So it doesn't seem to be politically correct for him to go ahead and try to push something even stronger through here in the short run.

Glaser: So it sounds like even internally within the Fed, there is lot of discourse about what the best thing to do is. But externally too, we’re see a lot of critics of quantitative easing seemingly applying a lot of pressure; do you think that's affecting the Fed's decision at all?

Johnson: I think so. And we’ve got a different set of facts. Last year it almost looked like a deflationary environment, and it looked like it wouldn't hurt to do QE2. It may raise prices a little bit, and that may even be a good thing.

This time around we’ve got both the core and the gasoline prices way up, and I think that has really scared some of the governors and the public about the effects of what QE3 might be.  I think that's why it's going to be very hard to push through, and why I am not expecting to see it on Friday. That doesn't mean that Bernanke doesn't have something up his sleeve to make the market feel a little bit better about itself.

Glaser: So, let’s turn to some of the economic data then. This week we heard a lot from manufacturers, an area that there have been some worries about weakness. What do you see in the data this week?

Johnson: This week the big news was the durable-goods orders which came Wednesday, and that was a very good piece of news in that orders were up 4.5%. It was driven almost entirely by autos and airplanes. Obviously, we got the big American Airlines order in there to Boeing, and certainly Boeing will play an important part in our economy in the second half of the year. So, it's not a number to be ignored, but I think it was good to have the orders number look good. The overall manufacturing number looked good even ex the airplanes; it was still an up number.

So, I think all of this shows that the manufacturing economy is not collapsing, and in fact the shipments in the manufacturing sector really kind of showed what the industrial production report showed last week, which is that in each of the last three months shipments of industrial goods have gone up. So, the time that you worried about the manufacturing economy falling apart was apparently this past spring and not necessarily now.

In fact, even on the global scale this week, we got the flash reports, which are early and subject to revision, on both Europe and China. China's PMI number moved up this latest month to just about the 50 mark, so it's up. The European number stayed up, and it was around 51ish, and it stayed the same as the prior month, which was much better than expectations.

So, maybe we're not crumbling. Some of our regional PMI numbers here in the United States looked a little weaker last week, and we’ve got the Richmond Fed report, which is a nonevent, this week, which is also a negative. But I think on balance, manufacturing is holding itself.

Glaser: What about housing?

Johnson: Housing, there we had a kind of more mixed picture. We started out the week with new-home sales being down a little bit from the previous month. But the number is so small right now at around 300,000, it really is a tiny part of the economy unfortunately. And it really didn't move enough that I have to think about it very much. The better news was home prices went up 0.9% in the latest month, which should be June. So, that's good news on that front, and we've had some better news on housing prices lately and hopefully we sustained a little bit more here through the summer.

Glaser: It might be bit of an understatement to say the market is a little bit jittery right now. Are there any reports that are coming up that you think might jolt the market in some way?

Johnson: Well, there's a few coming up, and just even in the short run, just to watch in general, initial unemployment claims, there are a number of people who have been watching really closely, and they have gotten a lot better lately. But I would caution, we've had a couple of big banks, Bank of America and UBS, announce rather big layoffs, and the layoffs may occur relatively quickly. And some week those are going to pop into the numbers and make them look a little funny. So, I'd be a little careful. But just because the number pops back up, I won't immediately run for the hills on that number. People have really gotten kind of focused on that number. Keep in mind, you should look at that on a four-week moving average basis, too. So, that's upcoming.

Then, on Friday, the gross domestic product revision for the second quarter is due, and we grew something like 1.3%-1.4% in the second quarter on the first calculation. We subsequently had some new export data that's come in, and it looks to me like the GDP could be revised down to 1.0%-1.1% growth instead. So, we're going to move the GDP number back a little bit for the second quarter, and that could panic people a little bit. too, I suppose.

Glaser: Well, it's definitely something to keep an eye on. So, overall, what's your take on the economy right now?

Johnson: I think we're neither booming nor busting is how I would like to put it. We aren’t falling apart. As many people like to say, "Oh, this one's down a record low, and we would have had a recession without this piece of data." But then you look at a lot of other pieces of data and look at them like a mosaic, and you really see an economy that's struggling. But it's still growing, and it's not falling apart. That's not to say, it can't be pushed with some big external force, some natural disaster, or some war, but right now, we're creeping along at a slow pace.

Glaser: Bob, thanks for your take today.

Johnson: Thank you.

Glaser: For Morningstar, I am Jeremy Glaser. 

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Jeremy Glaser  is markets editor for Morningstar.com, the sister site of Morningstar.co.uk.

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