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Money Advisor Wealth Management Worldsource

Money Advisor Wealth Management Worldsource

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Concerns about Cyprus and the Eurozone Debt Crisis

The Markets

 

Overall, markets were somewhat choppy during the week. Concerns about Cyprus and the Eurozone debt crisis overshadowed markets early on. A positive report on durable goods from the Commerce Department helped push markets higher, as did a home-price index report from Standard & Poor’s Case-Shiller that showed the biggest yearly increase in home prices since the summer of 2006. This report seemed to have held more sway with investors than either weaker-than-expected new home sales or lower-than-anticipated consumer confidence.

 

The U.S. Treasury market generally has benefitted from worries inspired by the Eurozone debt crisis. The latest episodes in the crisis – the Cyprus bank bailout and Italy’s failure to form a government – helped nudge rates lower last week. The U.S. continues to be perceived as relatively safe.

 

Fears about Eurozone debt issues generally have had a positive effect on gold prices, too, helping the precious metal reach a record high price in September 2011. That has not been the case this year. Gold finished the quarter down by more than 5 percent.

  

how fast should the united states’ economy be growing? According to The Economist, “In the three years since the end of the recession in mid-2009, growth averaged 2.2 percent, barely half the 4.2 percent average of the seven previous recoveries.” This begs the question: How fast should the economy be growing?

 

Economists, academics, and policy makers have been trying to figure that out. Many have started with an economic theory put forward by noted economist Milton Friedman in 1964. His “Plucking Model” postulates the business cycle is like a string attached to a board. The board represents “the ceiling of maximum feasible output.” Once in a while, the string is plucked down by recession and then it springs back. The idea is the depth of a recession will be mirrored by the strength of the recovery that follows.

 

At first blush, the Plucking Model doesn’t appear to apply to this recovery. The Great Recession was the deepest downturn since World War II, and the country hasn’t snapped back. According to several recent reports, there may be a reason for this. Our ‘ceiling of optimal output’ – the fastest rate at which our economy is expected to grow – may be lower than it used to be.  

 

  • Productivity and Potential Output Before, During,      and After the Great Recession, a working paper from the San Francisco Federal      Reserve, found growth in the U.S. was slowing in the mid-2000s although      the slowdown was largely unrecognized before the Great Recession.
  • What Accounts for the Slow Growth of the Economy      After the Recession, a Congressional Budget Office study, determined      about two-thirds of the difference between America’s current growth rate      and the average growth after previous recoveries is due to long-term      trends including demographic changes. The other one-third is credited to      low demand for goods and services.
  • Disentangling the Channels of the 2007-2009      Recessions, by James      Stock of Harvard University and Mark Watson of Princeton University, also      found slower growth in the U.S. is largely the result of demographic      trends such as a limited labor supply as Baby Boomers have begun to retire      and the number of women joining the workforce has leveled off.
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Considered together, the reports seem to indicate U.S. economic growth began slowing before the recession and, unless demographic trends shift, our country may continue to experience slower growth.

 

Weekly Focus – Think About It

 

“I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. Twenty-six times, I’ve been trusted to take the game winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.”

Michael Jordan

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