uploads///Fed  GDP forecast

October FOMC Minutes Show the Economy Is Improving

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Dec. 4 2020, Updated 10:53 a.m. ET

The Fed’s adjusted 2015 growth estimates 

During the September FOMC meeting, the Fed raised its estimates for 2015 GDP growth from a range of 1.8%–2.0% to a range of 2.0%–2.3%. The Fed raised its growth forecasts due to the unusually strong second quarter GDP print and also the fact that first quarter GDP was revised upward from negative to positive. Second quarter GDP came in at 3.9% on an annualized basis, which is a very healthy number. However, the Fed took down its long-range forecasts.

Notwithstanding the revision in September, the Fed has been consistently high on its GDP growth estimates since the Great Recession.

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According to the October FOMC minutes, the Fed members noted that industrial production had fallen, which they attributed to the rise in the US dollar (which hurts exporters by making US-produced goods more expensive to foreigners) and the drop in oil prices, which flow through to industrial output.

They mentioned that housing has continued to recover slowly. Housing has been a disappointment for the simple fact that prices continue to rise and inventory remains tight, yet builders are still very cautious in spite of sky-high builder sentiment numbers. If there is one sector that will take the economy to the next level, it is housing. Housing employs a lot of people and therefore has a very high economic multiplier.

The consumer seems to be spending a little more, as evidenced by a rise in light vehicle sales, and household net worth numbers are bolstered by the rally in stock and real estate prices.

Finally, the Fed members mentioned that business investment in plant and intellectual property was “solid” in the third quarter. However, the forward-looking indicators point to a slowdown. Again, lower energy prices are having an effect here.

Implications for mortgage REITs

Mortgage REITs are affected differently by economic strength. Agency REITs such as Annaly Capital Management (NLY) and American Capital Agency (AGNC) tend to react negatively to strength because it telegraphs higher rates, which investors can trade via the iShares 20+ Year Treasury Bond ETF (TLT).

REITs that focus on mortgage origination such as PennyMac Mortgage Investment Trust (PMT) welcome strength, as it helps increase origination activity. Non-agency REITs such as Two Harbors Investment (TWO) benefit from a more benign credit environment. Investors interested in trading the mortgage REIT sector via an ETF can consider the iShares Mortgage Real Estate Capped ETF (REM).

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