March Economic Update

The economy

U.S. economy back at “full” employment

With the unemployment rate dropping to 5.5% in early March, the economy has reached the upper limits of the Federal Reserve’s estimate of long-run normal unemployment (5.2% - 5.5%). GDP growth remains stable, with a current estimate of 2.2% growth for the fourth quarter of 2014. The housing market recovery continues at a slow-but-steady pace, with prices rising twice as much as inflation during 2014 (+4.5%) according to the 20 city Case-Shiller Index. The most uncertain aspect of the economic recovery in the U.S. remains the consumer. Confidence is high, but wage growth has been slow and spending has dropped in recent months. Lower spending can be explained by lower gas prices, but also indicates that consumers are saving the extra money in their budget instead of spending it. While this may be the right choice at the individual level it does have a negative impact on the economic growth, as approximately two-thirds of gross domestic product is generated by consumers. All things considered, the U.S. economy appears to be on solid footing.

The bond market

Interest rates back to year end levels

After an initial drop during January interest rates have bounced back to beginning-of-year levels, putting pressure on fixed income investments. Investors have begun reacting in anticipation of the Federal Reserve raising interest rates in the second or third quarter of the year. While the effects of these expectations may play out on the short end of the yield curve, longer-dated bonds should continue to be driven by supply and demand. With global interest rates well below those in the U.S., we believe there will be continued ample demand for U.S. debt. Much like quantitative easing in the U.S., the European Central Bank’s new bond buying program should suppress yields throughout the Eurozone.

The stock market

Stocks bounce back into positive territory

Stock market volatility continued during the month of February, but this time to the up side. U.S. and international developed markets rose nearly 6% during the month and are well into positive territory for the year. The value of the Euro against the U.S. dollar fell to near a 12-year low in early March, which had contributed to the underperformance of foreign investments in late 2014. Forward looking valuations for the S&P 500 Index are now slightly above the 25-year average, but strong earnings and a growing economy provide a solid backdrop for these levels. The U.S. large cap market has evaded a 10% correction for three calendar years in a row. A correction of this magnitude has historically occurred annually. With stocks reaching record levels and consumer confidence at 10-year highs, it would not be surprising to see the recent volatility continue as investors assess positive economic reports and future Federal Reserve policy.






Treasury yields

Stock indexes


Prime rate




Dow Jones



LIBOR rate (3 mos.)




S&P 500



Unemployment rate







15-year mortgage rate




Bond indexes


30-year mortgage rate




Broad Market Barclays Agg


CPI (12-mo. ending 1/31/2015)




US Corporate Barclays Capital


GDP (fourth quarter 2014)



US Government Barclays


Oil price (price/barrel)



Mortgage-Backed Barclays


Gold (oz.)





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