Economic Fundamentals Suggest Continued Subpar Growth
Expectations for the economy, the Fed and the fiscal cliff are intertwined and actions in each area influence actions in the other areas such that there are no silos in economics – or in policy. Fed action is not independent of economic expectations nor fiscal policy expectations. Therefore financial markets are caught in this recursive process of the economy, policy reaction and then the economy again and again.
In fact, it is becoming clear that it is the lack of improvement in the economy that is driving Fed actions and increased concerns about the fiscal cliff. In late July the signals of economic disappointment became apparent. Capital goods orders slowed sharply and this was followed by a backdrop of deterioration in the orders components of various purchasing managers’ indexes.