Sequestration

Only in America would we desecrate the English language to find a word to describe what our government is up to. Yes, March 1 is the official sequestration date. But don't expect the government to declare the next Federal Holiday to be "Sequestration Day." Here are a couple of points about this word. First of all, the word sequestration means confiscation or seizure of assets. No one is proposing a seizure of assets here. What we are talking about is automatic and severe budget cuts. In this case we will defer to the Congressional Research Service which has rewritten the dictionary to expand the definition to mean... the permanent cancellation of budgetary resources by a uniform percentage. Moreover, this uniform percentage reduction is applied to all programs, projects, and activities within a budget account.
Okay, now that we know what it means, the questions that follow are... will it happen and if it does happen, what affect may it have upon our lives and especially the economy? There have been many articles written regarding what could happen if the budget is cut by approximately 10% overnight. These cuts include all discretionary spending from jobless benefits to food inspections to defense. Not all cuts would happen immediately. For example, if there are furloughs of Federal workers, we have read that the furloughs may take 30 days or more to implement. That gives Congress and the Administration more time to come up with a solution. And you know what they do when they have extra time? Usually nothing. There is no doubt that dropping hundreds of millions of dollars out of the budget will take some steam out of the economy this year. This could lead to lower rates and oil prices. We just don't think that the cuts will be allowed to take hold all year. With a compromise of some kind, there will be some cuts, but how much remains to be seen.

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The Numbers Don't Lie

This week the markets were focused upon the all important employment report. While the number can be volatile from month-to-month, the dip in first time unemployment claims during the previous two weeks made the markets more optimistic regarding January's numbers. They came in at a lackluster 157,000 jobs created for the month with an unemployment rate of 7.9%. These numbers were worse than expectations; however, a revision of previous data added over 300,000 new jobs to the data previously released in 2012. The numbers don't lie. There have been additional reports released recently that show the economy is growing more quickly. For example, the December orders for durable goods were much higher than expected. Preliminary numbers indicated that the growth of the economy stalled in the fourth quarter, but this pause was attributed to temporary factors such as the weather according to commentary by the Federal Reserve released after the Fed meeting ended on Wednesday.
As we have pointed out in the past, a growing economy is great news. But it also means that we can expect higher prices to join the party. It is not a coincidence that home prices rose last year. More recently, oil prices are up around ten percent and interest rates have begun creeping up as well. All along we have warned that the Federal Reserve Board has no power to keep rates low in a stronger economy. Nor would they want to. There was more drama regarding the Fed meeting this week for this very reason and rates eased a bit when the Fed indicated they are continuing their support for low rates. Meanwhile, it is expected that those who have been on the sidelines may very well recognize that this is their last chance to purchase a home which is on sale. Rates and home prices are up slightly, but they are currently still a bargain. If the numbers keep rolling in like they have, this fact may no longer be the case.

Keith Stewart
www.ChicagosMortgageChoice.com