John Williams outlines the must-know signs pointing to a recovery

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Oct. 11 2020, Updated 12:09 p.m. ET

The San Francisco Fed’s John Williams speaks on economic recovery

Dr. John Williams, president and CEO of the San Francisco Fed, spoke on the normalization of monetary policy and monetary tightening in a presentation to the Association of Trade & Forfaiting in the Americas in San Francisco on Thursday, May 22. The topic for the presentation was “The Economic Recovery and Monetary Policy: The Road Back to Ordinary.” In his speech, Williams was upbeat on the overall U.S. economic outlook, primarily due to improvements in the labor market and consumer spending. Due to these factors, the Fed was beginning to take steps towards the normalization of monetary policy by tapering monthly asset purchases.

The fiscal drag on economic growth has lessened

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The Federal government has eased up on spending cuts and there have also been improvements in the budgets of state and local governments. Congress has also avoided another stand-off on the Federal budget, which will go a long way in lowering economic uncertainties for businesses. When businesses are uncertain about the economic climate, they tend to hold back on investment and hiring.

On the housing sector

However, the housing sector still remained a concern. Home construction and sales had slowed since 2012 and early 2013. A lot of the slowdown had to do with the increase in mortgage rates since mid-2013 and home price increases. However, since interest rates were still low and housing still affordable compared to pre-recession highs, improvements in the labor market would provide the needed boost to the recovery going forward.

GDP growth in 2014 and 2015

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An unusually severe winter affected almost all segments of the economy. The decline in Q1 GDP due to this factor was estimated at ~1.5% by some forecasters. However, consumer spending and job creation, which were subdued during the winter, are now showing a bounce this spring. The economy added ~2.4 million jobs over the past 12 months, with the highest recorded in April 2014 (288,000). These trends should provide favorable momentum for GDP growth over the rest of the year.

According to Williams, “With the recent spending data and dissipating headwinds, the turnaround in momentum from the first quarter is palpable. I expect a rebound in the current quarter and look for real GDP growth to average around 3 percent for 2014 and 2015. This exceeds the underlying trend rate of GDP growth of around 2 percent, based on population growth and productivity gains. This sustained recovery in spending should continue to fuel sizable gains in employment and income.”

Investor impact

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An increase in above-average GDP growth would benefit businesses and should favor stock prices, all else equal. An increase in business activity would also benefit companies in the transportation and logistics space. One ETF with exposure to the sector is the iShares Transportation Average ETF (IYT), which tracks the Dow Jones Transportation Average Index. Top IYT holdings include railroad companies Union Pacific (UNP) and Kansas City Southern (KSU). Both companies are also part of the S&P 500 Index (VOO), which invests in the 500 largest publicly listed companies in the U.S. by market capitalization.

Economic expansion usually accompanies increases in interest rates, which would reduce bond prices. Investors can benefit from rising rates by investing in inverse bond ETFs like the ProShares Short 7–10 Year Treasury Fund (TBX). Inverse bond ETFs provide returns inverse to or opposite of the underlying benchmark index, which would benefit these ETFs as the Fed begins normalization and monetary tightening.

To find out Williams’ views on the normalization of the Fed’s balance sheet, please read on to Part 3 of this series.

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