The Economy…
Economic activity remained soft during the first quarter by several measures while AIER’s leading indicators held at a neutral 50 level for the second straight month. A number of forces including weather, labor issues at West Coast ports, the rising dollar, and the negative impact on the energy industry from falling crude prices may have dragged down first-quarter growth to as little as 1 percent or less, on an annual basis. But strong fundamental support for consumer sentiment suggests that consumer spending may drive stronger growth in the second quarter.
…Inflation…
AIER’s inflationary pressures scorecard suggests inflationary pressures eased last month as just eight of 23 indicators showed rising pressure compared with 13 that showed falling pressure in March. Energy prices led by gasoline rebounded, showing the first gains in eight months and driving the consumer price index higher in February, while food costs decelerated. Productivity growth is slowing amid rising labor costs, but core CPI price increases remain modest.
…Washington…
Federal Reserve policy makers signaled their willingness to push credit costs higher for the first time in nine years, removing the word “patient” from their forward guidance. Yet mixed economic data suggest a longer wait for the first move. More important for growth and market stability will be the pace of any increases in target interest rates and where the Fed decides to stop.
AIER’s inflationary pressures scorecard suggests inflationary pressures eased last month as just eight of 23 indicators showed rising pressure compared with 13 that showed falling pressure in March. Energy prices led by gasoline rebounded, showing the first gains in eight months and driving the consumer price index higher in February, while food costs decelerated. Productivity growth is slowing amid rising labor costs, but core CPI price increases remain modest.
…Washington…
Federal Reserve policy makers signaled their willingness to push credit costs higher for the first time in nine years, removing the word “patient” from their forward guidance. Yet mixed economic data suggest a longer wait for the first move. More important for growth and market stability will be the pace of any increases in target interest rates and where the Fed decides to stop.
Tax data from the Congressional Budget Office show U.S. consumers directly or indirectly account for over 90 percent of federal tax revenues. Breakdowns by income levels show the top 20 percent pay the vast majority of federal taxes while the bottom 40 percent receive support.
…Investing
While households may need to adjust financial holdings that are comparatively light on fixed-income securities and loaded with equity assets, that step may be put off by a questionable outlook for total returns on bonds. Current yields are low and the prospect of Fed moves to raise rates aren’t encouraging efforts to rebalance portfolios away from shares and into bonds.
As equity investors, households have tended to tilt cash flows to global markets over domestic for much of the past decade. That preference softened in recent months. But given the strong relative performance of U.S. markets compared with their global counterparts since the recovery began, households may still be over allocated in domestic equity funds despite the larger flow of new cash into global equity assets, and may need to further reduce domestic exposure.