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U.S. Economy Sends Mixed Signals: Job Gains, but Soft Growth

June 5, 2017

Marcus Winbush, CFP® — CEO, True North Capital Alliance

The U.S. economy added 138,000 jobs in May—reducing unemployment to a 16-year low of 4.3%. That’s good news for job hunters, Federal Reserve policymakers, and others who look for signs that the labor market is tightening. However, the softness of recent economic growth continues to be a nagging though muted concern. These mixed signals will create the backdrop for the Fed as it prepares for the June 13-14 policy meeting at which members will decide, among other things, whether to raise rates and how to proceed with plans to shrink the Fed’s $4.5 trillion portfolio.

Key Takeaways from the May Jobs Report

The May jobs report released on June 2 showed moderate job gains in a labor market that is likely approaching “full” employment. In May, there were notable job gains in health care (+24,000), mining (+7,000), professional and business services (+38,000), and food services/drinking places (+30,000). Other major industries held steady.

On a down note, the labor participation rate (i.e., the number of Americans aged 16 or older working or actively looking for work) declined by 0.2% to 62.7%. According to the Bureau of Labor Statistics, the labor participation rate continues to be lower than historic norms: “After rising steadily for more than three decades, the overall labor participation peaked at 67.3% in early 2000 and subsequently fell to 62.7% by mid-2016.” Among other factors, the large cohort of aging/retiring baby boomers is a significant contributor to this decline.

Job gains reported in March and April were revised down by 66,000 based on data from subsequent government and business reports. Factoring in these adjustments, the labor market averaged gains of 121,000 per month over the past 3 months. Even with these revisions, Fed policymakers remain confident that the economy is on the right track and that gains averaging 100,000 jobs monthly are sufficient to accommodate people entering the workforce.

Average hourly earnings rose by 4 cents in May to $26.22; over the year, earnings have risen by 63 cents or 2.5%. Although lower unemployment is good news, workers may not be ecstatic because wages have grown ever so slowly during this recovery. However, it is generally believed that a continued tightening of the labor market will put pressure on employers to raise wages to compete for and retain skilled workers. Some employers are already reporting a shortage of skilled workers to fill openings, especially in construction and manufacturing.

Outlook for Near-Term Economic Growth

The other half of the equation that the Fed watches is the inflation rate. The Fed has deemed 2% inflation as the target needed to reflect healthy economic growth. When the Fed raised the federal funds rate in March, inflation was approaching the 2% target, but it has since backed off to around 1.5%. In the minutes of its April meeting, the Fed expressed the opinion that the slowdown in inflation was likely transitory; however, inflation has yet to rebound. The Wall Street Journal reported on an interview conducted Thursday with Dallas Fed President Robert Kaplan in which he stated the Fed’s take on inflation: “The most likely case is we’re going to see gradual, not rapid, but gradual increase in the inflation rate to our 2% objective over the medium term—over the next couple of years.”

On Balance … Fed’s Next Move?

Fed members continue to telegraph plans to increase the federal funds rate one or two more times this year—likely making the next move at their June policy meeting. Equally important to economists and analysts is having the Fed lay out a plan for shrinking its $4.5 trillion balance sheet, which includes bonds and other assets. The Fed stopped purchasing assets three years ago but has continued to reinvest the proceeds as assets mature, maintaining their balance.

Minneapolis Fed Chair Neel Kashkari has led the charge to define a detailed plan for reducing the balance sheet—even to the point of dissenting at the Fed’s March policy meeting. Reducing the balance sheet will be no small feat when you consider that the Fed’s balance sheet was less than $1 trillion at the start of 2008. However, the Fed is determined to signal its intentions well before the June meeting and to lay out a detailed plan for normalizing its policy regarding these holdings.

All in all, we expect a rate increase in June—likely a quarter of a percent, taking the federal funds rate to a range of 1% to 1.25%.


True North Capital Alliance is registered as an investment advisor with the states of Minnesota and Texas. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment advisor does not constitute an endorsement of the firm by securities regulators nor does it indicate that the advisor has attained a particular level of skill or ability.

Past performance is not a guarantee of future results.

All expressions of opinion are subject to change. This content is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

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U.S. Economy: Rebounding from 1st Quarter Slowdown

May 8, 2017

Marcus Winbush, CFP® — CEO, True North Capital Alliance

During the first quarter of this year, the U.S. economy began showing signs of slowing growth with softer inflation and job creation numbers. Analysts and economists questioned whether this was a temporary slowing in economic growth or whether it signaled a longer-term trend. Indeed, this was one of the key questions for the Federal Open Market Committee at its most recent policy meeting on May 2-3.

The Fed’s Growth Outlook

Although few people expected the Fed to raise interest rates at the May policy meeting, the Committee’s assessment of the outlook for economic growth was a matter of great interest. The Fed’s statement issued on May 3rd expressed confidence that the first-quarter slowdown in economic growth is likely to be short-lived. The Committee stressed the positive performance in the U. S. economy since their March meeting:

  • Solid overall job gains in recent months and a decline in the unemployment rate.
  • Modest increase in household spending with an outlook for continued growth in consumption.
  • Firming in “business fixed investment.”
  • Inflation nearing “the Committee’s 2 percent longer-run objective.” However, the Committee acknowledged that consumer prices (excluding energy and food) had declined in March.

At the end of its deliberations, the Committee reiterated its position that, “with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term.” With that assessment, the Fed voted unanimously to leave the federal funds rate unchanged at a range of .75 to 1 percent, which it had established at the March policy meeting.

Strong April Jobs Report

The April jobs report released on Friday, May 5th corroborated the Fed’s outlook, showing a rebounding U.S. economy. The labor market gained 211,000 jobs in April, outperforming economists’ forecasts for the month. Unemployment dropped to 4.4 percent—its lowest level in a decade. Major job gains were broad-based: leisure and hospitality up 55,000, health care and social assistance up 37,000, financial activities up 19,000, and mining up 9,000. Other major industries, including construction and manufacturing held steady.

The report showed progress in reducing the number of “involuntary part-time workers” in the labor market. Involuntary part-time workers are people who would have preferred full-time employment, but were working part-time because their hours had been cut back or because they could not find full-time employment. The number of workers in this category declined by 281,000 in April, and the report showed a decrease of 698,000 year-to-year.

At 62.9 percent, the labor force participation rate remained steady in April, showing slight change over the past year. After revisions in the totals for February and March, overall job gains averaged 174,000 over the past three months.

Further good news could be found in the earnings report for April. The average hourly earnings for all employees on private nonfarm payrolls rose by 7 cents to $26.19. Over the year, average hourly earnings have risen by 65 cents (2.5 percent).

Next . . .

Given a firmly rebounding economy, many economists think the Fed is likely to raise the federal funds rate at the Committee’s June meeting if the economy continues its growth trend. A June rate move is to be expected if the Fed is to make good on its projection of at least two more rate increases this year as economic conditions allow.


True North Capital Alliance is registered as an investment advisor with the states of Minnesota and Texas. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment advisor does not constitute an endorsement of the firm by securities regulators nor does it indicate that the advisor has attained a particular level of skill or ability.

Past performance is not a guarantee of future results.

All expressions of opinion are subject to change. This content is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

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Which Financial Advisor Is Right for You?

April 10, 2017

Marcus Winbush, CFP® — CEO, True North Capital Alliance

We all have financial goals and dreams we would like to have come true, but all too often, dreams go unrealized or only partially fulfilled because we lack clear, actionable plans.

Is now the time for you to take your financial planning to the next level? Are you ready to become more intentional about funding your retirement and leaving a legacy for the people and causes dear to you? Or perhaps you are ready to start investing for the first time. Any one of these is an excellent reason to seek financial planning or investment assistance. If this is your time, let’s consider which type of financial planner might be right for you.

Many Financial Professionals Call Themselves Financial Planners

The term financial planner covers a variety of titles, services, and skills: financial advisors, financial representatives, financial consultants, brokers, or investment advisers. From their titles, you might assume they all do pretty much the same functions and have the same regulatory oversight. That assumption would not be accurate.

According to the Financial Industry Regulatory Authority (FINRA), “the first step in selecting an investment professional is to see if the person and his or her firm are registered.” Financial professionals in this category include investment advisors, Certified Financial Planners®, and registered representatives.

Investment Advisor

Investment Advisors (IAs) also called Registered Investment Advisors (RIAs) provide advice about securities and a broad array of financial/investment services. Services may include financial planning for college education and retirement, estate and investment planning, and asset management.

IAs must be registered with either the Securities and Exchange Commission (SEC) or state securities regulators, depending on the amount of assets they manage. Typically, RIAs do not “sell” proprietary investment products; their compensation comes primarily from fees they charge for their advisory service. At a minimum, IAs must pass the Series 65 exam administered by FINRA, but they usually add other credentials such as the CFP® designation to enhance their qualifications.

Certified Financial Planner®

Advisors who earn the CFP® designation are also qualified to provide investment advice for a full suite of services, including retirement, estate, and investment planning as well as asset management. To earn the CFP® designation, advisors must complete a comprehensive course of study approved by the CFP Board followed by a rigorous CFP® Certification Exam, which tests their ability to apply financial planning knowledge to real-life situations. Before they can use the CFP® designation, advisors must have several years of hands-on experience providing financial service for clients.

Another significant distinction relates to the standard of care you can expect. CFP® professionals and other registered advisors are bound by the fiduciary standard established in the Investment Advisor Act of 1940. To comply with the fiduciary standard, investment advisors must act solely in the “client’s best interest when offering personalized financial service.” This means that registered advisors must not recommend an investment simply because they will receive more compensation from that investment. It also means that advisors must make sure their advice is accurate, complete, and as thorough as possible. RIAs are responsible for providing clients with objective advice.

Broker/Registered Representative

Brokers, sometimes called registered representatives, are licensed to buy and sell securities—stocks, bonds, mutual funds, and other investment products. A broker or a registered representative working on behalf of a broker-dealer must fulfill the suitability standard of care for clients.

The suitability rule states that brokers must make recommendations that are consistent with the best interest of the customer; it does not require the broker to place his or her interest below that of the client. This means that if an investment fits the needs of the client in some way, the broker is free to recommend the investment that pays them more money even though if may mean higher expenses for the client. Ultimately, it is important to realize that brokers’ primary role is to represent their broker-dealer, not the client.

What’s Right for You?

Many investors find the Certified Financial Planner® to be an excellent choice because of their experience, educational qualifications, and certification standards. With these factors as background information, you will need to interview the advisor you are considering. Finally, before you commit to work with an advisor, be sure you are comfortable with their investment philosophy and investment strategies. Also, look for someone you trust and with whom you can communicate effectively.

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Will the Fed’s Latest Rate Increase Affect You?

March 20, 2017

Marcus Winbush, CFP® — CEO, True North Capital Alliance

The Fed’s March 15th increase of the federal funds rate was much anticipated by most analysts. As a result, the markets were well prepared for the modest increase of one-quarter percent, taking the federal funds rate to a range of 0.75 to 1 percent. This is only the third increase since the federal funds rate was reduced to near zero during the Great Recession, which began in 2008.

A Good News Rate Increase

While consumers do not look forward to Fed decisions that increase the cost of borrowing, there is clearly good news in the recent announcement. Quite simply, the good news, according to Fed Chair Janet Yellen, is this: “The U.S. economy is doing well.” In her March 15th press conference, Yellen expressed the Fed’s “confidence in the robustness of the economy and its resilience to shocks.”

Since the worst of the financial crisis, the economy has added “around 16 million jobs,” the unemployment rate dropped to 4.7 percent in February, and inflation is moving up toward the Fed’s 2 percent target. Yellen conceded that “people with less skill and education and certain sectors of the economy” still face challenges in the labor market. However, many people are expressing optimism about their job market prospects, and consumer sentiment has improved. Chair Yellen believes that “people can feel good about the economic outlook.”

How Does the Feds’ Rate Move Affect You?

This interest rate move will have ripple effects that increase the cost of borrowing over time. The federal funds rate, also known as the “overnight rate,” is the rate banks pay to borrow money from Federal Reserve banks. The federal funds rate is directly correlated with the prime interest rate that banks charge their most creditworthy customers. As the federal funds rate goes, so goes the prime interest rate and many forms of interest that consumers pay for essentials and lifestyle items.

Thus, you can expect to see changes such as the following over time.

  • Higher Mortgage Interest: According to Bankrate.com, mortgage rates for 30-year mortgages increased from 4.21 percent to 4.31 percent last week. this was the second increase in two weeks. The outlook is for mortgage rates to continue rising gradually this year. Likewise, interest rates for home equity lines of credit and adjustable rate mortgages will gradually rise as the Fed continues to adjust the federal funds rate upward.
  • Higher APR on Credit Cards: Most credit cards carry a variable interest rate, which is closely tied to the prime interest rate. Thus, you can expect interest on credit card accounts to move upward commensurate with the Fed’s rate increase.

    The surest way to avoid being hit by rising credit card interest is to pay the account balance each month. If this is a challenge, consider using the snowball debt payoff method described in my recent post to eliminate credit card debt.

  • Little Change in Interest Paid on Savings: Savers are certainly hopeful to see higher interest paid on savings. Currently, the average savings account pays only about .10 percent with some online savings accounts paying around 1.0 percent and slightly higher. Unfortunately, the amount of interest that banks pay on saving accounts is not likely to increase quickly in response to the Feds’ rate hike.

Outlook

The Fed projects a federal funds rate of 1.4 percent by the end of this year and 2.1 percent next year. That means we should expect one or two more rate increases this year. The timing and amount of future rate increases will continue to be gradual and dependent on the continued strength of the economy.


True North Capital Alliance is registered as an investment advisor with the states of Minnesota and Texas. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment advisor does not constitute an endorsement of the firm by securities regulators nor does it indicate that the advisor has attained a particular level of skill or ability.

Past performance is not a guarantee of future results.

All expressions of opinion are subject to change. This content is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

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U.S. Labor Market Continues to Strengthen: 235,000 New Jobs in February

March 13, 2017

Marcus Winbush, CFP® — CEO, True North Capital Alliance

The February jobs report issued by the U.S. Labor Department on Friday, March 10th exceeded analysts’ projections by a long shot. Including February’s data, total nonfarm payroll employment has been on a rising trend, averaging 209,000 new jobs per month over the past three months. That’s a significant tick up from last year’s pace of 180,000 net new jobs per month, which Fed Chair Yellen noted as satisfactory when she spoke in Chicago on March 3rd. Chair Yellen noted that “economic developments since mid-2016 have reinforced the Committee’s confidence that the economy is on track” to achieve the Fed’s statutory goals of maximum employment and price stability.

Given the strength of the February jobs report, most analysts expect the Fed to make the first of this year’s projected rate increases when the policy committee meets this week (March 14-15).

February Jobs Report by the Numbers

In February, total nonfarm payroll employment increased by 235,000 jobs:

  • Sectors: Strongest growth was in construction (up 58,000), private educational services (up 29,000), manufacturing (up 28,000), and health care (up 27,000).
  • Unemployment Rate: The unemployment rate went down slightly from the previous month to 4.7 percent. Compared with 4.9 percent a year earlier, overall unemployment is continuing a stable downward trend. Although the overall employment picture is brighter, jobless rates for some segments of the population continue unchanged (Blacks at 8.1 percent; Hispanics at 5.6 percent).
  • Labor Participation Rate: The labor participation rate sits at 63.0 percent. This measure reflects an additional 447,000 people in the labor market over the January total.
  • Long-Term Unemployed: The number of individuals who have been jobless for 27 weeks or more was essentially unchanged at 1.8 million (23.8 percent of those who are unemployed). However, the total number of long-term unemployed declined by 358,000 over the past year.
  • Involuntary Part-Time Workers: Workers in this category would have preferred full-time employment but were working part-time for economic reasons. The number of people in this category showed little change at 5.7 million.

The earnings data was an especially bright spot in the February report. Average hourly earnings across all employees increased by 6 cents to $26.09; this growth follows a 5-cent increase in January.

Thus, overall job gains remain solid and broad-based, and unemployment is in line with Fed expectations for the longer run.

Case for Scaling Back Monetary Policy Accommodations

Since 2014, the Fed has been gradually scaling back monetary policy accommodations, such as quantitative easing and low federal funds rate, previously needed to support the U.S. economy through the aftermath of the 2008 financial crisis. This process has been slower than many expected, but the Federal Open Market Committee (FOMC) were determined to proceed with caution giving the U.S. economy time to strengthen. In her March 3rd comments, Chair Yellen noted that the “U.S. economy has exhibited remarkable resilience” in recent years.

Yellen gave her clearest signal yet of the Fed’s next move: “…we currently judge it will be appropriate to gradually increase the federal funds rate if the economic data come in about as we expect.” Certainly, the February jobs report will be viewed as a strong confirmation.

Heading into the March 14-15 meeting, the FOMC seems to be lining up in favor of raising rates—likely another quarter-percent increase taking rates to a range of .75 to 1.00 percent.


True North Capital Alliance is registered as an investment advisor with the states of Minnesota and Texas. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment advisor does not constitute an endorsement of the firm by securities regulators nor does it indicate that the advisor has attained a particular level of skill or ability.

Past performance is not a guarantee of future results.

All expressions of opinion are subject to change. This content is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

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