U.S.
stock markets finished the week – and the quarter – on a positive note.
The
Federal Reserve’s accommodative monetary policy and strong profit growth helped
provide the lift needed to propel the S&P 500 Index to a record high. The
Dow Jones Industrials Index also finished the week above its previous record
close. For the quarter, the S&P 500 was up about 10 percent, the Dow was up
about 11.3 percent, and the NASDAQ finished up about 8.2 percent.
Despite
the strong performance overall, markets were somewhat choppy during the week. Concerns
about Cyprus and the Eurozone debt crisis overshadowed markets early on. A
positive report on durable goods from the Commerce Department helped push markets
higher, as did a home-price index report from Standard & Poor's
Case-Shiller that showed the biggest yearly increase in home prices since the
summer of 2006. This report seemed to have held more sway with investors than
either weaker-than-expected new home sales or lower-than-anticipated consumer
confidence. Late in the week, the GDP growth rate for the fourth quarter of
2012 was revised upward, but remained sluggish at 0.4 percent annually.
The
U.S. Treasury market generally has benefitted from worries inspired by the Eurozone
debt crisis. The latest episodes in the crisis – the Cyprus bank bailout and
Italy’s failure to form a government – helped nudge rates lower last week. The
U.S. continues to be perceived as relatively safe.
Fears
about Eurozone debt issues generally have had a positive effect on gold prices,
too, helping the precious metal reach a record high price in September 2011.
That has not been the case this year. Gold finished the quarter down by more
than 5 percent.
how fast
should the united states’ economy be growing? According to The Economist, “In the three years since
the end of the recession in mid-2009, growth averaged 2.2 percent, barely half
the 4.2 percent average of the seven previous recoveries.” This begs the
question: How fast should the economy be growing?
Economists,
academics, and policy makers have been trying to figure that out. Many have
started with an economic theory put forward by noted economist Milton Friedman
in 1964. His “Plucking Model” postulates the business cycle is like a string
attached to a board. The board represents “the ceiling of maximum feasible
output.” Once in a while, the string is plucked down by recession and then it springs
back. The idea is the depth of a recession will be mirrored by the strength of
the recovery that follows.
At first blush,
the Plucking Model doesn’t appear to apply to this recovery. The Great
Recession was the deepest downturn since World War II, and the country hasn’t
snapped back. According to several recent reports, there may be a reason for
this. Our ‘ceiling of optimal output’ – the fastest rate at which our economy is
expected to grow – may be lower than it used to be.
- Productivity
and Potential Output Before, During, and After the Great Recession, a working
paper from the San Francisco Federal Reserve, found growth in the U.S. was
slowing in the mid-2000s although the slowdown was largely unrecognized
before the Great Recession.
- What
Accounts for the Slow Growth of the Economy After the Recession, a Congressional Budget Office
study, determined about two-thirds of the difference between America’s
current growth rate and the average growth after previous recoveries is due
to long-term trends including demographic changes. The other one-third is
credited to low demand for goods and services.
- Disentangling
the Channels of the 2007-2009 Recessions, by James
Stock of Harvard University and Mark Watson of Princeton University, also found
slower growth in the U.S. is largely the result of demographic trends such
as a limited labor supply as Baby Boomers have begun to retire and the
number of women joining the workforce has leveled off.
Considered
together, the reports seem to indicate U.S. economic growth began slowing
before the recession and, unless demographic trends shift, our country may
continue to experience slower growth.
Weekly Focus – Think
About It
“I've
missed more than 9,000 shots in my career. I've lost almost 300 games.
Twenty-six times, I've been trusted to take the game winning shot and missed.
I've failed over and over and over again in my life. And that is why I
succeed.”
--Michael Jordan
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