Year-End Recap of 2013

2013 has proven to be a quite eventful year. Amidst current events like the Edward Snowden scandal and arms negotiations with Iran, businesses and investors had to navigate around a fiscal cliff, taper tantrums, new healthcare rules, and a government shutdown.

Despite the volatility, job growth, the catalyst for stronger demand, has continued uninterruptedly.  Job growth averaged 183,000 jobs per month in 2012. In 2013, year to date job growth has been similar to the 2012 numbers, averaging 186,000 new jobs per month. That is the good news. Unfortunately, that pace has been inadequate to close the employment gap created during the recession and prompt acceleration in economic growth.

Economic activity has improved somewhat compared to last year. One of the benchmarks is the Institute for Supply Management’s Manufacturing Index. This index has averaged 53.7 in 2013, a marked improvement from 2012’s 51.7 average. However, the ISM’s Non-manufacturing Index, which covers the majority of the economy, stayed roughly flat from last year.

On a more positive note, consumer balance sheets improved in 2013. Households, in aggregate, have surpassed the pre-recession high watermark in net wealth. The majority of the gains have come from financial holdings. However, the average family still needs home prices to continue to rise to get back to previous net wealth levels.

The barometer for consumer discretionary spending, automobile sales, has reflected the improvement in household wealth, but just like wealth for the average family, it still has a ways to go to get back to pre-recession levels. Personal vehicle sales from 2000 – 2007 averaged 16.8 million cars sold per year. In 2013, personal vehicle sales averaged only 15.4 million. This is certainly an improvement from the 14.4 million car sales in 2012, but still a ways off from historical averages.

Taking it all in, 2013 was a year of mediocre job growth. We saw some improvement in economic activity, and household balance sheets continued the gradual repair process, which has led to revived consumer spending. In light of the headwinds that faced the economy, this performance is not as mediocre as it seems. But one has to take into account the amount of monetary policy accommodation provided by the Federal Reserve.

What to expect in 2014

One of the key themes for 2014 will likely be the handoff from liquidity to growth-driven performance. As policymakers sought ways to bring the economy back onto its pre-recession growth trajectory, fiscal and monetary policy were utilized in a strong fashion during the early stages of the recovery. Earlier this year the fiscal cliff started the consolidation process on the fiscal side, and 2014 is likely to bring the beginning of the consolidation process on the monetary policy side. The handoff is likely to result in increased volatility in terms of interest rates, especially in longer tenors. Many Fed watchers expect the Federal Reserve to attempt to continue to anchor the longer end of the yield curve by lengthening its forward guidance for the Fed Funds. This means that for all of us who invest on the short end (including 1- and 3-month LIBOR), 2014 will be much like 2013: low rates.

Rogier Kamerling, Treasurer
December 18, 2013