A New Insight for Investors: How Financial Markets Interact with the Economy

Monday, June 29, 2015

In the short term (over a span of months to a year), especially during transitional periods in the business cycle, economic conditions may appear to have a direct impact on the financial markets, and the financial markets, conversely, may appear to directly influence the economy. Around 2005, for instance, the housing bubble contributed to the overheated financial markets, and when the financial markets crashed in 2007-2008, the economy plunged into a severe recession. Clearly, over the short term, financial market performance and economic conditions were affected by each other.

Charts and Tables
Related Articles

Gasoline Prices Rebound and Food Prices Stabilize

Thursday, June 18, 2015

The Everyday Price Index (EPI) increased 1.1 percent in May after showing no change in April. On a not-seasonally-adjusted basis, the CPI increased 0.5 percent in May after rising 0.2 percent in April. AIER’s EPI is not seasonally adjusted. 

Charts and Tables
Related Articles

June Business Conditions Monthly

by AIER Staff
Tuesday, June 9, 2015

The recovery’s accelerating credit growth provides a positive sign for the economy and the financial sector.


The Economy…
Our business-cycle leader’s index picked up in May, jumping to 64 following three months at the neutral 50 level. Despite a poor first-quarter performance amid unusually harsh weather, we expect real GDP to return to a moderate pace of growth, with private domestic demand faring even better. We base our analysis on sound fundamentals seen in key areas, including consumer spending, business investment, and to a lesser degree, residential housing. An improving economy should encourage moderate credit growth and an opportunity for lenders to boost income. Commercial bank lending has expanded in key categories for several years as financial institutions capitalize on interest rates that have remained near historic lows. 

Recent data suggest a reemergence of inflationary pressures. Overall, 12 out of 23 measures tracked by our inflationary pressures scorecard point to rising price pressures, up from nine last month. Energy prices have rebounded from the plunge in the last half of 2014, while the coincident rally in the U.S. dollar tailed off in March. Since then, the depreciating value of the currency has pushed up import prices.

The Consumer Price Index rose in April for the third straight month. The increase in food prices, which lasted throughout 2014, has stalled this year. At the same time, energy prices have firmed. These two forces largely offset one another, resulting in only a mild increase in the overall CPI. The increase in core CPI, which excludes volatile food and energy prices, remains close to its long-term historical average. 

Fed officials continue to explain their thinking and current views on the economy while laying out their framework for reaching a decision on “liftoff.” They need to see continued improvement in the labor market and they need to have “reasonable confidence” that inflation is headed back up to the 2 percent goal. Projections by Fed members for the outlook for inflation suggest confidence has weakened recently.

Fed Chair Yellen noted in a recent speech that the FOMC would proceed cautiously during the period of policy normalization, that she and her colleagues at the Fed are data-dependent, and that interest rates are not on a predetermined course. We expect the first rate increase later this year but only periodic increases after the initial “liftoff.”

Credit growth is typical for a healthy and expanding economy and is a positive development for financial stocks. For some financials, the rebound in equity markets and the improving economy have been positive supports. The low interest-rate environment can benefit issuers of debt but can be a challenge for lenders who earn income on spreads, or the difference between what they charge borrowers for loans and what they pay for the money they lend.

Financial stocks in the U.S. have trailed the rebounding S&P 500, which has marched to fresh records at least 10 times this year, yet conditions suggest support for further gains. Global financial shares have performed best in emerging markets and Asia outside Japan. Sector stocks with the biggest growth potential—and the greatest risk—may be found in Europe and Japan. 

Charts and Tables
Related Articles

Teach the Teachers: Improving Economics Instruction in High Schools

Monday, June 1, 2015

The first Teach-the-Teachers Initiative (TTI) on June 23-27, 2014, covered three topics: “Money and Inflation,” “Business Cycles and Unemployment,” and “Government and the Economy.” Twenty-two teachers attended the program at the AIER campus in Great Barrington, Mass. They came from both public and private institutions. They represented diverse fields of study such as economics, business, mathematics, history, psychology, science, and even Spanish, as well as diverse geographic locations such as Massachusetts, Connecticut, and New Jersey.

Charts and Tables
Related Articles

The Federal Budget: Constraints Limit the Options

Tuesday, May 26, 2015

If we are to understand why the federal budget is structured the way it is and why fiscal policy choices are constrained, we must look at history to see how we got to where we are today. The nature of fiscal policy is such that decisions made by earlier generations affect the options of future generations. This was true in the past and it is true today—our choices will shape the opportunities of future generations.

In the end, we believe the future economic health of the nation depends on building agreement around the budget facts. This report is one step on that path.

Charts and Tables
Related Articles