Peter Nulty

The state of the economy (excerpt)

On the Trading DeskSM11-7-12
By Peter Nulty

Dr. Brian Jacobsen, CFA, CFP®, answers investors’ questions about the current state of the economy in this excerpt of On the Trading DeskSM from Friday, November 2, 2012. Brian, chief portfolio strategist with Wells Fargo Funds Management, LLC, spoke with guest host Andy Azinger.

Listen to the full interview.

Those investor questions: The first one is interesting. “What impact will Hurricane Sandy have on the economy? Will the recovery create jobs and stimulate economic activity?”
Economic activity could pick up with the rebuilding process, but, we have to keep in mind some economic activity will be lost. Also, there was wealth that was destroyed with all the property damages. And lives were lost. That’s devastating. If we had to put a dollar amount on the amount of economic activity that was lost because of the shutdowns, think about LaGuardia Airport, JFK Airport. You also had a number of cities that were without power. The whole subway system was shut down in New York. You had ports that were shut down. There was actually lost output. That probably amounted to about $20 billion. Now, for a $16 trillion economy, that’s not exactly a loss. It’s probably going to work out to be about 0.2% of GDP as far as the actual effect. But some of it will be made up as we go through the rebuilding process.

Second, an investor asks, “What is the fiscal cliff really?  Will we go off it?”
The fiscal cliff is something that is going to have to be dealt with by the end of the year. The fiscal cliff is a combination of expiring tax cuts, new tax increases, and automatic spending cuts that amount to about $600 billion. But I don’t think that we’re actually going to go off the fiscal cliff. Because there are different ways in which the government can arrange to perhaps pass a bill or to come to some sort of compromise to mitigate or alleviate some of the parts of this fiscal cliff. For example, they could decide to punt the problem into the next session of Congress. Because, in my opinion, politicians have a very keen survival instinct, they don’t necessarily want to go back and face their voters saying, “Because we couldn’t play nicely we ended up raising all of your taxes, creating a recession.” So I think the fiscal cliff is something to watch, but it is not something that I’m losing a lot of sleep over.

Okay, next question, “How come the recent Federal Reserve asset-buying program hasn’t seemed to do as much as the previous ones?”
If you look at what was done with each one of those quantitative easing efforts, the first one was well over $1 trillion, purchasing mortgage-backed securities and Treasury securities. The second one was about half that size, and so it had a smaller effect, as I think you should expect. The second round of quantitative easing was focused on buying only Treasury securities. At that September meeting where they announced a new round of quantitative easing, they decided they were going to be purchasing mortgage-backed securities to keep mortgage rates lower. We haven’t seen the effects yet, but I think that we are going to continue to see this gradual and slow improvement in the housing market. Monetary policy operates with long and variable legs, meaning you’re going to probably have to wait to see the impact.

And this last question, Brian, “Is the recent pickup in economic activity a mirage?”
I think it is not a mirage, it is a genuine recovery. It seems like in 2010, 2011, and now 2012 again we had this pattern where during the summertime we’ve gone through a summer slump. And then the economy begins to pick back up, gather a little bit more steam as we get into the third quarter and mainly into the fourth quarter of the year. Unfortunately, natural disasters affect the economy. There was the tsunami in Japan that affected the economy, especially the automobile industry and parts suppliers. We recovered from that eventually. Then we had some political issues as well. There was the whole debt ceiling debacle, and then the problems in the eurozone, which I think really put a chink in investors’ and consumer confidence. So I think what we see now is a genuine recovery. But the question is whether or not it is somehow going to be short-circuited by some sort of an exogenous force—something that comes from the outside.

We have a brief program note for our audience, Brian. Brian Jacobsen will be in our studio hosting a video commentary with Jim Kochan and John Manley on Thursday, November 8. All three strategists will have been answering questions from investors the day after the election and watching the markets. So on Thursday they’ll provide both market and investor reaction. Also, on Friday, November 9, Brian will host another video commentary, a Market Outlook with portfolio managers Tom Ognar, head of the Heritage Growth team, and Lyle Fitterer, head of the Municipal Fixed-Income team, both with Wells Capital Management and both friends of this program. We encourage you to tune into both programs if you can. Brian, thank you so much.
Thank you.

The views expressed are as of 11-7-12 and are those of Chief Portfolio Strategist Brian Jacobsen, Ph.D., CFA, CFP®, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.


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