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Weekly Economic Review: The Fed And Quantitative Easing

No economic event influenced the markets more this week than the subject of quantitative easing;

  • the Fed's January FOMC meeting minutes exposed uncertainty or unharmonious discussion between the members about the need for more QE, and the potential pitfalls of unwinding their QE balance sheet.
  • a paper from respected economists pointed out potential issues with QE.
  • the Federal Reserve spun this report saying many elements were not applicable to the current situation.

Investors have associated QE with stock market improvement. Although one can make a circumstantial case this is true, my belief is that there never was much cause and effect. Investors should ignore QE for a broad understanding of the economy. The economy is still weaning off of the great stimulus, and now is being hit by sequester (government spending austerity).

The overall effect (all things being equal), should be a slower growing economy than 2012. But all things are never equal.

The Econintersect economic forecast for February 2012 continues to show weak growth. The underlying dynamics have a whiff of improvement - but the zinger in the data was a supply chain contraction. However all the recession markers have evaporated, and one of our alternate methods to validate our forecast remains recessionary (but still only slightly so). Basically, we are saying that not enough products (crude, intermediate, and finished) were moved for sales or manufacture in February.

ECRI now believes a recession began in July 2012. ECRI first stated in September 2011 a recession was coming . The size and depth is unknown. The ECRI WLI growth index value has been weakly in positive territory for over three months - but in a noticeable improvement trend. The index is indicating the economy six month from today will be slightly better than it is today.

Current ECRI WLI Growth Index

Initial unemployment claims rose from 341,000 (reported last week) to 362,000 this week. Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background here and here).

The real gauge - the 4 week moving average - rose from 352,500 (reported last week) to 360,750. Because of the noise (week-to-week movements from abnormal events AND the backward revisions to previous weeks releases), the 4-week average remains the reliable gauge.

Weekly Initial Unemployment Claims - 4 Week Average - Seasonally Adjusted - 2011 (red line), 2012 (green line), 2013 (blue line)

Bankruptcies this Week: RDA Holding, parent company of The Reader's Digest Association

Data released this week which contained economically intuitive components (forward looking) were:

  • Rail movements are somewhat improving looking at the 4 week average, but longer term trends are still declining.
  • The FOMC meeting minutes showing confusion over the effects of quantitative easing, as well as timing. Although this is not necessarily intuitive - it has caused many to re-evaluate the future and become less optimistic.

All other data released this week either does not have enough historical correlation to the economy to be considered intuitive, or is simply a coincident indicator to the economy.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.