Economic Review 2013 – 2nd Quarter

The State of the general economy can help or hinder a business’ prospects and therefore has a direct impact on the value of a business. The economic recovery following the recession of 2007-2009 continues, but modestly. Following the June 18-19, 2013, meeting of the Federal Open Market Committee (the “Committee”) of the Federal Reserve, the Committee issued a statement that economic activity appears to have returned to moderate growth in the first quarter of 2013. Household spending and business fixed investment have advanced and the housing market has strengthened, although the unemployment rate remains elevated and fiscal policy has become more restrictive.

Gross Domestic Product

The U.S. Bureau of Economic Analysis (BEA) estimates that real gross domestic product (GDP) — increased at an annual rate of 1.8 percent in the first quarter of 2013. Quarterly GDP data for the preceding ten years is shown in the following figure.

Seasonally Adjusted Annualized Rates; Shaded Bar Indicates Recession

Sources: U.S. Bureau of Economic Analysis and National Bureau of Economic Research. GDP percent change is based on chained 2005 dollars.


The employment situation in the United States remains weak. In the 25 consecutive months from February 2008 to February 2008 to February 2010, 8.7 million non-farm jobs (net) were lost. In the 40 consecutive months from March 2010 to June 2013, 6.6 million non-farm jobs (net) were created.1 The unemployment rate peaked at 10.0 percent in October 2009 and has abated somewhat to a still-elevated 7.6 percent as of June 2013.2 Such a high level of unemployment places severe strain on the economy as consumers are unable or reluctant to spend. The past ten years of employment data are presented in the following figure.

Shaded Bar Indicates Recession

Sources: Department of Labor, Bureau of Labor Statistics, and National Bureau of Economic Research. Data represents non-farm payrolls.

Interest Rates

The Committee meets periodically to assess economic conditions and determine appropriate policies to fulfill its dual mandate of fostering maximum employment and price stability. At its June 18-19, 2013, meeting the Committee kept target federal funds rate at zero to 0.25 percent and anticipated that an exceptionally low federal funds rate is likely to be warranted as long as unemployment is greater than 6.5 percent and inflation expectations remain close to the Committee’s goal of 2.0 percent. The Committee also announced that it would continue its quantitative-easing policy of purchasing mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury bonds at a pace of $45 billion per month, with an end date dependent on the evolution of the economic outlook and progress towards the Committee’s longer-term employment and inflation objectives. The Committee will continue extending the average maturity of the Treasury securities it holds and reinvesting proceeds from maturing bonds. Interest rates have recently increased sharply, as investors consider the expected time until a reduction in the Federal Reserve’s rate of bond purchases. Nominal yields on U.S. Treasury securities rose sharply during the quarter, reflecting investors’ expectations of an increase in short-term rates and in the slope of yield curve. As a result, corporate bond yields and 30-year mortgage rates increased considerably during the second quarter. Ten years of historical interest rate data are shown in the following figure.

Shaded Bar Indicates Recession

Source: Federal Reserve Statistical Release H.15 (519) Selected Interest Rates.

Current Events

Financial markets in United States were volatile during the second quarter of 2013, as investors reacted to economic data and Federal Reserve communications. Positive economic indicators related to the U.S. housing market, including increased sales of new and existing homes, elevated general consumer confidence, with national home price indices appreciating between 5 percent and 12 percent over the twelve months through April 2013. However, market participants reacted negatively to the Federal Reserve’s indication of a possible beginning of the reduction in bond purchases, potentially as early as the end of 2013.

The European sovereign debt crisis that began in earnest with Greece in 2010 and the subsequent recession continue to adversely affect local economies and employment levels. Although the proximate cause was the 2007-2009 financial crisis, a combination of persistent structural deficits, trade imbalances, and real estate bubbles in the decade prior have resulted in a series of European nations requiring substantial financial bailouts. A “troika” of international lenders consisting of the European Union (the “E.U”), the European Central Bank, and the International Monetary Fund has provided extraordinary financial support to five of seventeen euro area countries: Greece (April 2010), Ireland (November 2010), Portugal (May 2011), Spain (June 2012), and Cyprus (June 2012). The unemployment rate in the E.U. is 10.9 percent as of June 2013, falling slightly from the May 2013 record high of 11.0 percent.

In addition to the potential risks of financial instability faced by many European countries, the Japanese equity markets also displayed substantial volatility during the second quarter of 2013. On April 4, 2013, the Bank of Japan announced that it would significantly expand its asset purchases over the next two years in an attempt to combat the country’s persistent deflation. Japanese Prime Minister Shinzo Abe’s lack of commitment to specific structural and fiscal reforms decreased investor confidence in the ability of the asset purchase program to promote long-term economic growth. As a result, the early second quarter gains in Japanese equity markets were erased in June.


In recent months, various statistical reporting agencies have revised the U.S. economy’s projected growth rate downward as the strength of the economic recovery has moderated and substantial uncertainty remains about the ability of American and European governments to enact policies that will stabilize debt levels while supporting economic growth. In June, the Federal Reserve slightly lowered its projected range of near-term GDP growth from its March forecast, increased its expectations of 2014 GDP growth, and lowered its projected range of GDP growth in 2015. This data is presented in the following figure.


Source: Federal Reserve

The Congressional Budget Office’s (CBO) May 2013 report estimated that the federal budget deficit for fiscal 2013, which ends September 30, will be $642 billion, the lowest level since 2008.  The CBO projects subdued economic growth in 2013, reflecting the sharp increase in federal taxes and the reduction in federal spending that have already begun or are scheduled to occur under current law.3 The CBO estimates that real GDP will grow 1.4 percent in 2013 and 3.4 percent in 2014, with growth averaging 3.6 percent from 2015-2018. GDP is expected to remain below the economy’s potential until 2017.4

Inflation, as measured by the Core Consumer Price Index, which excludes the effects of food and oil, is forecast to be 1.5 percent in 2013, eventually increasing to an average of 2.0 percent per year in the 2019-2023 period.5 As of June 2013, Moody’s Investor Service continues to report a negative outlook for the United States’ credit rating due to the trajectory of the country’s debt-to-GDP ratio. Although the global economy continues to recover from the severe recessionary shocks which began in 2007, the process has been slow and unsteady, and consumers, businesses, and investors remain cautious.


1 Source: Bureau of Labor Statistics. “Employment, Hours, and Earnings from the Current Employment Statistics survey (National).”
2 Ibid. Unemployment rates reported on a seasonally adjusted basis.
3 U.S. CBO. “Updated Budget Projections: Fiscal Years 2013-2023.” May 2013.
4 U.S. CBO. “An Update to the Budget and Economic Outlook: Fiscal Years 2013-2023.” February 2013.
5 Ibid.