What did the FOMC Minutes in July 2013 Tell Us About The Economy?

Highlights of FOMC Minutes in July 2013 (June 18-19, 2013)

• During the FOMC Minutes in July 2013 the committee decided it was still premature to normalize monetary policy.
• Private non-farm employment continued to rise while government employment continued to moderately decline.
• Household’s real disposable income increased steadily and home owners’ equity values increased as home values rose during the quarter.
• State and local construction expenditures continued to decline.
• Personal consumption expenditures (PCE) and the consumer price index (CPI) increased most likely due to a moderate decrease in consumer prices.
• Forecasts for inflation were revised down on reflecting the softer than expected consumer prices
Gross domestic product (GDP) is expected to rise between 2.3% and 2.6% for the rest of 2013.

The overall feeling from the FOMC Minutes in July 2013 committee meeting is mixed. While some positive statistics such as disposable income, home values, and increases in PCE and CPI were mentioned, there was also a fair share of negative statistics as well. This includes pushing off normalizing monetary policy, decreases in consumer prices, lowered GDP expectations and lower inflation rates. Besides for an decrease in unemployment rate many of the positive areas of this report were due to weaknesses in other areas. For example, personal consumption was higher, but this was largely due to a decrease in overall U.S. consumer prices.

How Will the Latest Minutes Effect the Economy

If you read the Minutes of the Federal Open Market Committee released on July 10th you were probably left with a feeling of uncertainty. This seemed to be the general consensus to the economy in the second quarter. While on one hand there was several positives there was also a fair share of negative indicators as well. Overall, expectations for GDP and inflation were lowered for the second quarter compared to the first. This leads me to believe that the economy remained steady over the second quarter, and advancements in some industries were due to the decline of others.

Before the Minutes were released it was heavily anticipated that we would begin to start normalizing monetary policy. Again, the committee pushed that off declaring it was still premature to pursue a normalization, and that the U.S. is still 2 to 3 years away from normalization. For investors this means that we can expect a stable or possibly a modest gain in the stock market for the upcoming quarter. Until monetary policy is normalized we are technically still in the wake of the latest recession.

One positive note that was very encouraging was a decrease in state and local government construction expenditures. As unemployment declines and the private sector continues to hire the need for government jobs decreases. Overall, unemployment numbers have been very encouraging the past several months, however the number of job openings failed to increase this quarter suggesting that the rate at which unemployment has been improving may soon decrease.

To sum everything up the second quarter fell short of expectations, and a number of items has to be revised downward. This doesn’t mean that economy slipped in the second quarter, but it does indicate that the economy is not improving as fast as previously projected. Over the past few years I have personally read several of these Minutes and I always recall GDP, inflation, and consumer spending estimates to be projected much higher than they actually turned out to be. I always dismissed many of these projections because it seems that the committee is trying to instill a notion of confidence in the public and investors with the numbers they are projected. My experiences with this document date back to 2008 in the midst of the recession.

What Should Investors Look For?

The latest Minutes leaves little to be desired in the stock market for the third quarter. I personally project the stock market and several key indexes (DJIA, S&P 500, & NASDAQ) to remain largely unchanged this quarter or possibly increasing a modest amount. A few industries investors may want to look at for long-term purchases of stock are consumer staples, shipping and manufacturing businesses, and real estate. While it may be premature to purchase within these industries it’s important to get in ahead of the curve.

Investors who invest in these types of businesses are betting on the health and growth of the U.S. economy as these are businesses that generally improve as the economy does. While we are waiting for the return to normalization of monetary policy, and inflation rates to improve these businesses will be priced lower relative to other industries. As stated in the latest Minutes we are still several years away from normalization of monetary policy so I think these types of investments could be great long-term purchases. Over the next few months look for any dips in price that could present a low buying point to make a play on some of these industries.

Real Estate

Investing in real estate will not net you the gains that it would have 10 or 15 years ago, but that does not mean there isn’t a sizable gain to be made from investing in this industry. Home and equity values have been improving rapidly over the past few quarters and construction bids and multifamily starts are up for the second quarter. Sales of new and existing homes were also up for the second quarter. The real key for the real estate industry will be the normalizing of monetary policy and increased inflation rates. Banks will start lending more when interest rates become more favorable. There are several companies that have commercial and/or residential real estate holdings and investing in them before the market completely improves is very important. This industry will require some heavy research and flawless timing to make a great gain. Another area to look at (even though its hard to trust them at the moment) is companies that have a large amount of mortgaged back securities and survived the latest recession.

Shipping & Manufacturing

As the economy improves over the next several years shipping and manufacturing companies will improve as well. These companies are an integral part of the U.S. economy and are closely tied to consumer spending. As we observed in the latest Minutes both consumer spending and disposable income increased in the second quarter. While some of the success of consumer spending is due to lower consumer prices it’s still a great sign for these businesses. In the next few quarters I forecast some possible gains in these industries.
 

Consumer Staples

Consumer staples are businesses that produce essential products such as food, tobacco, beverages and household items. These businesses always move in line with the general health of the economy and there is still a lot of room for improvement on the road to recovery. Investors that invest in consumer staples have a strong belief in the U.S. economy and the direction it is heading in. While the latest Minutes was not particularly promising the economy did improve overall (just not at the pace that was originally projected). We are still a ways off from a full recovery, and as I noted earlier in the post a good measure to go buy is the normalization of monetary policy. When monetary policy returns to average historical rates it will mean that the FOMC has full confidence in the state of the economy and is ready to increase interest rates allowing for a period of growth. These companies are usually considered a pretty safe investment, because overtime the economy grows and the population increases providing these companies with higher sales and revenue growth.

Wrap Up

It goes needless to say that after the past few quarters we expected a bit more from the FOMC Minutes in July 2013. We might have just gotten a little ahead of ourselves and a little bit over-enthusiastic about how the market and economy has been improving recently. We are still waiting on the normalization of monetary policy, and interest rates and inflation rates are still incredibly low. Many of us were expecting an announcement that would signal the beginning of normalization of monetary policy, but that seems to be on hold for at least another year. Still, there were some positive signs such as improving unemployment rates. Overall, I get a mixed feeling about the second quarter some good and some bad, which coincidentally seems to be how the market performed this quarter!

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