Less Than Great Expectations

Markets were quiet Friday, partly because last week was the last time to pack in unused vacation days or make the most out of a the partial week. Add in a snowstorm in the northeast and not much happens.

Friday was a day of Fed speeches, including Bernanke’s last as Fed Chairman.  Over the weekend, I watched Zero Dark Thirty, the dramatic account of the hunt for Osama bin Laden.  At the end, the CIA analyst who chased him down, played by Jessica Chastain, relieved that it’s all over, starts to cry.

I couldn’t help imagining Bernanke doing the same thing on Jan 1.

Legendary investor Peter Lynch once said, if you spend 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.’

Although there are a million ways to slice and dice the economy, but I prefer to simply look at ‘the big three’ – output, employment and inflation.


Gross Domestic Product

Output is the Gross Domestic Product (GDP), or the value of all of the goods and services produced and is generally considered a country’s standard of living.

Although we won’t know officially what the growth rate was for 2013 for a few months, it looks like we are on track for just under two percent real (or inflation-adjusted) GDP growth last year.

Two percent is below the long-term trend I expect that 2014 will better, but still lower than normal.  The question here isn’t so much about the exact level of low growth, but whether we’re experiencing the normal aftermath of a financial crisis or whether we’re in a structurally ‘new normal’ growth environment.  My bet’s on the former, but you never know.



Expectations for higher prices are muted entering 2014.  Core inflation, which excludes the volatile components food and energy, looks like it will be around two percent in 2013 and there is nothing to suggest that it will be much higher next year.

Inflation is a function of many factors, many of which just aren’t a concern today.  There is almost no disposable income growth, bank credit growth is weak, commodity prices are falling and there is almost no money multiplier – and that’s WITH the Federal Reserve bond buying (money printing) every month!

The big risk at this point is clearly not higher prices, which some economists would be happy to see.  The risk is that inflation is too low and we could slip into deflation, a terrible problem that’s difficult to solve.


Unemployment also looks like it will continue to follow 2013’s path towards a lower headline rate and some accelerating job growth.  The jobs picture is improving even beyond the top line rate and the question here but there are definitely some troublesome issues like the long-term unemployment rate and labor participation rate.



None of these expectations deviate very far from the consensus view.  They are simply continuations of what we have seen for the past several years – slow growth, low inflation and falling but still high unemployment.

Since these are basically consensus views, markets would probably be satisfied with these events or a positive surprise and, as you would expect, react poorly to negative surprises.

There are two problems with surprises; the first is that they are, by definition, unpredictable.  Second, they always happen, both good and bad.

Citigroup has a very interesting ‘surprise’ index that tracks the direction and magnitude of released economic data versus expectations that I promise to discuss in the coming weeks.

As always, we’ll just see how the year unfolds, positive and negative.