Quarterly Commentary

It appears that the economic recovery is indeed a jobless recovery, and a very slow one at that.  Although we began to see signs of progress in the spring, the economy appears to have stubbed its toe as concerns over the European sovereign debt crisis, the gulf oil spill, and weakening US economic data seem to have trampled the “green shoots” that were beginning to sprout.

First quarter GDP growth was revised downward to 2.7% from its initial reading of 3.2%, and second quarter growth came in at 2.4%, which met revised expectations.  As of July, the nation's unemployment rate remained at 9.5 percent, as the private sector added 71,000 jobs. However, that number was offset by the loss of 202,000 government jobs, which included 143,000 temporary census positions.  Overall, declines in consumer spending and home purchases, and weaker job creation have all contributed to the growing talk of a double dip recession. 

The Federal Reserve, at its August meeting, expressed concerns about the economic outlook going forward. As a result, they agreed to reinvest proceeds from expiring mortgage-backed security (MBS) investments into intermediate-term Treasury securities, a form of quantitative easing, which is a signal that the Fed remains in a supportive mode.  As a result, we believe that the Fed will not increase interest rates until the second half of 2011, at the earliest.  

On the regulatory front, Congress passed the largest set of financial regulations since the Great Depression, in what is known as the Dodd Frank Financial reform bill.  The bill claims it will rein in Wall Street excesses, end bailouts and ‘too big to fail’, and achieve financial stability by preventing future financial crises.  Reich & Tang is working to analyze the 2300 page bill to determine how it may impact our business going forward.  One consequence of this legislation is a possible drag on the economy, due to the implementation costs businesses will now face.

As we move into the third quarter, the general belief is that the economic recovery is still in place, albeit decelerating.  We concur.  As always, Reich & Tang continues to focus on its core strengths - liquidity and credit quality.  Hopefully, cash yields will trend higher over time as the economy grows, and this rising tide will benefit savers who have been undeservedly punished in this low rate environment.