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	Economic Outlook Given that the green shoots of the economic recovery have begun to wilt, the FOMC at their August 10^th meeting decided it would reinvest Agency and mortgage-backed securities (mbs) principal payments into Treasuries. Additionally, the Committee would roll over the Federal Reserve’s holding of Treasury securities as they mature. As Federal Reserve Chairman Bernanke would later explain, “FOMC participants observed that allowing the Federal Reserve’s balance sheet to shrink…at a time when the outlook had weakened somewhat was inconsistent with the Committee’s intention to provide monetary accommodation necessary to support the recovery.” The Fed also signaled that it is prepared and willing to do more if and when conditions warrant it. Collectively, the Fed Chairman and other policymakers do not see the economy slipping back into a recession, but they are very cautious about the near-term outlook, calling it “unusually uncertain.” Their concern is certainly justified, as one indicator after another topples across a broad cross-section of economic activity, increasing the risk of a double dip downturn. U.S. economic growth for the second quarter was revised lower to a 1.6 percent annualized rate from the initial estimate of 2.4 percent, which was down from 3.7 percent in the first three months of this year, which itself was down from the 5 percent rate of growth in the final quarter of 2009. It was the most sluggish showing in nearly a year and too weak to significantly drive down unemployment. It is generally believed that it takes about 3 percent growth in GDP just to create enough jobs to keep pace with the population increase. Weak indicators at the beginning of the third quarter added to the concerns about the economy’s loss of momentum at the end of the second quarter. Capital spending, one of the few bright spots in the recovery, declined in July. Big-ticket durable goods orders tumbled sharply lower as details showed a disturbingly broad-based retreat in orders. Orders for non-defense capital goods excluding aircraft, a proxy for future business investment, dropped 8 percent after climbing 3.6 percent in June. Shipments of those items, used in calculating GDP, decreased 1.5 percent after rising 1 percent the prior month. A slowdown in business investment could hit the jobs market, as employers are reluctant to take on more staff until they see more evidence of durable growth. The latest indicators in the housing sector contributed to the increasingly gloomy perceptions of the U.S. economy. Both existing and new home sales fell to their lowest levels in their respective recorded histories in July, the month that is typically the strongest sales month of the year. The combination of low home sales, high inventories and increased distressed transactions (foreclosures and losses) means prices should turn down again in coming months. As a result, new homebuilding will be restrained even further, making it a bigger drag on economic growth. The key to the recovery, if there is to be a sustainable one, is reducing unemployment. Job growth is paramount in underpinning consumer spending, but with consumer confidence slipping, there are causes for concern. This is particularly true as consumers continue to delever their balance sheet by paying down debt, saving more and spending less. Small businesses, the historical engine of job growth, are critical to the labor market and, by extension, to the recovery. The July reading of the National Federation of Independent Businesses (NFIB) survey of small business optimism indicated that the outlook for hiring is still bleak. Small businesses need to see a pick up in consumer spending so that they can start making plans to expand and start hiring. Consumers, however, need to see hiring before they start spending, and so on, and so on. Inflation is expected to remain low, which opens the door for the FOMC to act further on their commitment to take steps if the economic outlook deteriorates. Unfortunately, non-conventional easing by the central bank may do little in providing the right medicine for an ailing patient. Heightening the risks are continuing dysfunctions in the banking system, populist pressure encouraging anti-market, anti-growth policies, and governments under pressure to prematurely tighten fiscal policy. Additionally, the Fed appears stuck in a liquidity trap. Consumers are in de-leveraging mode, preferring to cut back spending to pay down debt and increase savings. Low, or even negative, rates aren’t likely to budge consumers into meaningful borrowing. Lower home prices and another hit to household equity, plus a chronically high level of unemployment, exacerbates the situation for the FOMC. This won’t stop them from trying to bolster the flagging economy, even if it results in a policy mistake. Higher rates and tighter monetary policy are very unlikely over the next twelve months.