Let me begin by wishing you all a very Happy New Year!
Last winter, when I penned this section of our newsletter, we discussed how some of the more important engines of our economy were starting to rev up. Specifically, housing and auto sales were showing signs of improvement and unemployment was beginning to drop. However, the one concern we had was that Gross Domestic Product or GDP seemed stagnated at 2% or less. Even the Federal Reserve (Fed) has had to modify its own forecast of GDP a number of times and each revision has shown weaker growth than did the previous version(s). The looming question is what will cause GDP to finally accelerate and migrate toward 3% since the ever important segment of our economy, housing, has been strong the past few years but it hasn’t been enough to dramatically boost overall economic activity. As previously mentioned, the unemployment rate has been declining but that is largely due to the decline in the labor force participation rate (people who are employed or actively looking). This has resulted in fewer people working despite the falling unemployment rate.
So what does this all mean for 2014? The Fed just updated its economic projections for 2014 and it expects the unemployment rate to be between 6.3% – 6.6% and GDP to increase 2.8% to 3.2%. Remember they’re constantly revising their forecasts downward, and hence often referred to as "always optimistic". Complicating the outlook for 2014 is the recent confirmation of Janet Yellen as the new Fed Chair. It’s believed that Ms. Yellen will be slower to taper the Fed bond buying spree in order to keep a lid on long term rates which dramatically increased during the latter half of 2013. For instance, the 10 year treasury yield increased from 1.75% to over 3.00% after Chairman Bernanke rattled his "tapering saber" in May. We’ve been told for some time now that tapering was to occur when both unemployment and inflation reached 6.5% and 2%, respectively, and we approach these levels, the first round of tapering, set at $10 billion, is scheduled to begin shortly. Tapering is a separate issue from the Fed raising short term interest rates. Ms. Yellen and other Fed speakers’ recent comments, combined with the low labor force participation rate (currently at a 35 year low) may mean the Fed will not start raising short term rates until the unemployment rate reaches 5.5%. With inflation stuck at 1.75%, economists at the Cleveland Fed calculate the most likely date the Fed will start short term rate increases is the first quarter of 2016. What does all this mean? Economists say we will likely see longer term interest rates continue to move higher and no change in short term rates this year. Stay tuned!
On a lighter note, 2013 was a good year at First Savings Bank Northwest and FFNW; it was also a pretty good year for the "Renton" Seahawks! We celebrated our 90th anniversary, addressed our regulatory problems, paid three quarterly dividends, our stock is up nearly 40%, and thanks to you, our valued customers, we’re starting to grow again.
As for 2014, I would like to start the year off by saying a very heartfelt HAPPY BIRTHDAY to our long-time past leader, Mr. Harry Blencoe, who turns 90 years young in February. After all, we are still often referred to as "Harry’s Bank"!