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Catalyst Strategic Solutions: Leading Indicators Increase in August; Inflation Remains in Check
Monday, September 23, 2013 7:00 AM

The Conference Board reports that its index of leading economic indicators increased 0.7 percent in August, the second consecutive monthly gain. Seven of the 10 indicators reportedly increased. These included interest rate spread, ISM new orders, average workweek and lower initial claims for unemployment. The negative contributor was building permits. Stock prices and consumer expectations for business both held steady.

For the six month period ended August 2013, the leading index increased 2.1 percent, marginally faster than the 2.0 percent growth pace during the previous six months.

Additionally, The FOMC met earlier this week and surprised many by announcing that the Fed will continue its current pace of security purchases, fearing “downside risks.” Meanwhile, the Labor Department reports consumer inflation increased 0.1 percent in August. Over the past 12 months, consumer prices have increased 1.5 percent while core inflation has advanced 1.8 percent, mostly on higher energy prices.

According to Brian Turner, chief strategist for Catalyst Strategic Solutions, the reports this week (for the most part) could prove beneficial for members and credit unions alike.

“The LEI and inflation reports seem to imply that consumer sentiment is improving and has been aided by stable market prices,” suspects Turner. “The Fed’s announcement indicates that consumers should be able to obtain financing at relatively low rates for at least another year or two.”

However, Turner says the reports also imply that volatility will remain in longer-term rates, namely mortgage rates.

“Recent upticks in long-term rates, while increasing the slope of the curve, has led to a material shift in mortgage applications over the past few months as refinancing applications have slipped to 61 percent of total applications, well below the 83 percent at year-end, but still higher than the 20-year average of 48 percent,” Turner notes. “Purchase applications have increased on improvements in both new and existing home sales over the past few quarters, yet total applications remain well under historical averages.”

The FOMC statement acknowledged that “the Committee sees downside risks to the outlook of the economy and the labor market as having diminished…since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement.”

Turner says all roads to economic recovery continue to pass through the employment sector.

“Stronger job creation eventually will increase consumer spending behavior and credit union loan demand,” Turner adds. “Even with stagnant wages, credit unions will continue to experience stable share growth.”

The challenge, Turner continues, remains with consumer spending - two-thirds of the nation’s GDP.

“Although the unemployment rate has dropped from 10.0 percent to 7.3 percent over the past few years, it has not translated into stable, long-term economic growth,” Turner says. “The Fed’s targeting of a 6.5 percent unemployment rate as the point when they would consider raising their overnight target rate could challenge future growth by attempting to raise short-term interest rates when the consumer might still be sitting on the sidelines.”