Economy Watch: Days Numbered for QE3?

By Dees Stribling, Contributing Editor

Investors, economists and financial journalists were watching the Federal Open Market Committee on Wednesday as it concluded its second day of meetings, and in the end the FOMC surprised on the side of winding the stimulus down, or at least reducing the rate of bond-buying starting at the end of 2013. Provided, of course, the economy continues growing in the fairly healthy way the FOMC predicts it will.

According to forecasts released after the meeting, the Fed is a bit more optimistic about the U.S. economy than it has been lately. For instance, the central bank is now forecasting that the official U.S. unemployment rate by the fourth quarter of 2013 will be 7.2 to 7.3 percent, compared to the 7.4 to 7.7 percent it forecast in December 2012. The Fed moreover projects that unemployment will be 5.8 to 6.2 percent by the fourth quarter of 2015; in December, the prediction was 6 to 6.6 percent. The Fed also revised its estimates for future inflation up a bit, but mostly the rate will still be in the milquetoast 2 percent range.

“If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year,” Fed Chairman Ben Bernanke said. He was also unusually specific in spelling out a timetable for winding down QE3: “We would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year,” he explained.

The question now is whether the Fed’s plans will in fact become a headwind to the relatively optimistic growth projects by the Fed. Combined with the sequester, it’s conceivable that the mere anticipation of the end of the QE3 stimulus might have a dampening effect on growth—maybe enough to keep those unemployment numbers up.

For the moment at least, investors seemed to be worried about that scenario. Wall Street reacted with predictable pessimism, with the Dow Jones Industrial Average dropping 206.04 points, or 1.35 percent. The S&P 500 declined 1.39 percent and the Nasdaq was off 1.12 percent. The yield on the benchmark 10-year U.S. Treasury note spiked to a 15-month high of 2.35 percent, the dollar was up against the euro, and the price of oil and gold both dropped.

Architecture billings swing upward in May

The FOMC might have overshadowed other economic news on Wednesday, but it wasn’t the only news for the day. Following the first reversal into negative territory in ten months in April, the Architecture Billings Index bounced back in May. The American Institute of Architects reported that its May index came in at 52.9, up dramatically from a mark of 48.6 in April.

As a leading economic indicator of construction activity, the index reflects the nine- to 12-month lag time between architecture billings and construction spending. The May score reflects an increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 59.1, up slightly from the reading of 58.5 the previous month.

“This rebound is a good sign for the design and construction industry and hopefully means that April’s negative dip was a blip rather than a sign of challenging times to come,” AIA chief economist Kermit Baker, noted in a press statement. “But there is a resounding sense of uncertainty in the marketplace—from clients to investors and an overall lack of confidence in the general economy—that is continuing to act as a governor on the business development engine for architecture firms.”