There’s good news in the economy |

There’s good news in the economy

Kimberly Nicoletti
Special to the Daily/Bob Bloch

Mario DeRose, a fixed income strategist at Edward Jones, sees a mostly positive outlook for the economy. But as he pointed out, no one can predict the future, so it’s important to diversify, or ladder your portfolio to prepare for different scenarios.

He presented “Outlook and Opportunities ” An Economic Perspective for 2007″ at the Summit Chamber’s annual meeting and awards breakfast Thursday, April 12 at the Silverthorne Pavilion.

Though not as strong as 2006, he said there has been healthy economic growth this year, at about 2.5 percent. However, the greatest driver of consumer spending involves the unemployment rate, which, at 4.4 percent, is lower than the average of the last 40 years. Consumer spending, which is intimately tied to the employment rate, makes up two-thirds of economic growth. In addition, a decrease in energy prices has helped consumption, he said.

Inflation remains in a holding pattern, with a core inflation rate of 2.7 percent.

Concerns still include: energy prices, budget and trade deficits and home sale trends.

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Energy prices involve a fragile balance between supply and demand, so any incident could increase prices, which cuts into consumer’s disposable income. However, the United States is not as dependent on oil as it has been in the past, simply because 85 percent of businesses in the nation are service-based, rather than manufacturing-based. If energy prices increase, it would not be the sole determiner of a rise in inflation, he said.

The budget deficit is near its historical average and, by itself, does not have a negative impact on the economy. In 1980, it was $4.9 trillion, and in 2000, it was $9.2 trillion.

The trade deficit, however, has raised some concerns, specifically with oil trade at a 28 percent deficit and the China trade deficit at 26 percent. Still, the trade deficit tends to be self-correcting, because as the dollar weakens, exports become more attractive to foreigners. In fact, there has been a record level of exports in the past several months. Ultimately, the savings surplus in the world is financing developed countries’ spending, he said.

Ten-year government bond rates remain low on a global basis; only the United Kingdom has higher rates than the United States, and the UK just passed the U.S. recently.

In looking at what’s the next move for the Federal Reserve, he said it raised short-term rates 17 times between June, 2004, and June, 2006, to contain inflation.

He said the Fed seems more comfortable with the economic outlook going forward.

He also pointed out that, historically since 1975, after the Fed paused in changing rates for four months or longer, its next move has been to cut rates again. The question remains when.

He said inflation expectations remain low for the long-term, despite concerns that inflation may rise in the short-term.

The housing market has shown an increase in delinquencies with mortgages, which has driven some lenders into bankruptcy. DeRose does not believe the slowing in housing will impact consumer spending significantly, since spending is influenced more by job growth. He expects higher inventory levels to keep prices soft for an extended period.

“While housing is slowing, we’re beginning to see some signs of bottoming, especially in the construction market,” he said. “Outside of housing, good things are going on in the economy.”

He predicts moderate economic growth with slower consumer spending, but he does not think a recession is likely in the near term.

He suggests laddering, or diversifying portfolios, because it decreases dependence on interest rate predications, which are often wrong, and it takes the guessing and emotion out of investment strategies. He encourages people to invest in higher quality bonds, diversify and invest regularly.

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