Economists closely examine how economic data differs from their forecasts, and draw inferences from these deviations. For example, should retail sales rise 0.4%, compared to forecasts of 0.2%, economists might opine that consumers were more positive, spent a little more and thus growth might be a little better than what was previously expected. Not a big surprise on the upside, but the 0.2% better growth in sales might be a “tell” that the environment is improving. In a normal economic environment, small surprises like this can be meaningful and contain important clues to the future.

But, as I’ve mentioned before, this is NOT a normal economy. Unemployment is very high by historical standards, consumers are laden with debt, and governments are cutting back on spending during a recession. Therefore, everyones’ expectations are very low — so much so that even unimpressive economic data is actually better than expected! Take monthly employment growth, for example. As growth slowed last Spring, the economy went from generating 200,000 net new jobs a month to under 50,000. By fall, however, net employment gains rose to the range of 100,000-125,000 per month, surprising many and helping power a stock market rally. Not only do these gains pale with those of late 2010: they are even less the natural growth in the labor force of 250,000 per month. But in today’s environment, they pass as surprisingly good. What else has surprised on the upside? Retail sales, which accelerated from a 1-2% annual rate last Spring to 4-5% annually; US exports; new home construction; business investment; lower imports — the list is long! Despite record low consumer sentiment, the US economy continues to grow at a slow, but positive, rate. It looks like we’ll end 2011 with 2% real GDP growth, which is actually “surprisingly” good!

Alas, it’s not good enough for 2012. While the US outlook is firm, dark clouds are gathering in Europe, where lack of decisive action by governments and investor fear of defaults have led to soaring interest rates on government debt. A toxic combination of fiscal austerity, and private spending cutbacks, will lead to a severe recession in Europe in 2012 and 2013. Asia is already feeling the impact as exports to Europe slow. While the US is the “best house in a bad neighborhood,” our 2012 growth will be impacted, and we’ll be lucky to escape without a recession and 0.5-1.0% real GDP growth. Unemployment is declining as discouraged workers stop looking for jobs; this will continue, and the jobless rate should decline under 9% even as their ranks swell. Will this also be a surprise, this time on the downside? Stock market weakness earlier in 2011 already forecast a 2012 slowdown in growth, as has the historic decline in interest rates to almost zero, so investors seem prepared for it. With consumers paying down debts rapidly, though, and a rebound in Asia, though, I expect the economy to rebound late in 2012, when the words “better than expected” will once again be heard from economists on the evening news!

Christopher H. DeVoe CFA

Constellation Asset Management, Inc.

Savings bonds that are more than 30 years old will no longer be earning interest. Redeeming these and reinvesting the proceeds into an interest bearing investment may be a wise decision.

Series EE savings bonds dated May 1995 to April 1997 typically pay less than 2% interest. Consider reinvesting those assets to achieve a better return.

Series EE savings bonds issued after April 2008 pay 1.4% interest or less. These are good candidates for redemption towards a higher yielding investment.

Series I Bonds with fixed rates above 0.5% additionally pay a variable inflation rate. These bonds may or may not be a good idea to keep depending on inflation forecasts.

Keep in mind that savings bonds issued before May 1997 accrue interest twice a year. If you decide to redeem these bonds, you may want to wait until the first day or two after interest has accrued to maximize your investment.
Discuss your savings bond holdings with your financial professional to make the best decisions for your particular circumstances and financial needs.

Conveniently located in Central New York state, Ann Wolfson Associates is a financial planning and consulting firm dedicated to helping individuals, families and organizations reach their financial goals. If you have questions about this article or if you would like to become a client of Ann Wolfson Associates, please call (315)449-4730.