Recovery Ahead
􀂄 H2(09) recovery still expected
Following a somewhat more than expected 6.1% annualized decline in real GDP in
Q1(09), we still foresee a less negative -2.0% pace in Q2(09) before a return to
positive annualized growth of 2.0% in Q3(09), 2.5% in Q4(09), and 2.2% in
calendar 2010. The weaker than anticipated start of the year reduces our 2009
calendar average real GDP forecast by 40 basis points to -2.6%, but the financial
markets will be more focused on quarterly sequential growth. Improved
manufacturing and consumer confidence indexes in April are encouraging.
􀂄 FOMC: Recovery on track, no new initiatives
With weakness fading, Fed officials appear hopeful that actions to date and already
under way will be sufficient to help generate a recovery. We agree. Further
expansion of asset purchase plans remains possible, but such expansion will likely
depend more on mortgage rates than Treasury yields. The recent climb in Treasury
yields has been offset by lower credit spreads. We expect modest Fed tightening in
2010, even though a Taylor Rule framework alone would suggest the continued
need for a negative funds rate. Taylor Rule models are based on conventional
policy actions only and do not allow specifically for inflation expectations or the
degree of stimulus from fiscal policy and financial markets.
􀂄 The week ahead
We forecast a 550,000 decline in payrolls and a 0.4 point rise in the unemployment
rate in the April report; declines in payrolls averaged 685,000 in Q1. The nonmanufacturing
ISM index will probably also show weakness fading (forecast: 44.0
after 40.8). The Fed’s Loan Officer Survey will probably show some further
slowing in the rate of tightening of lending standards. The pending home sales
index probably rose slightly, consistent with sales at least bottoming. The Fed chair
is scheduled to testify on May 5. Bank stress test results are likely on May 7.