It’s going to be harder to grow the Italian economy than you think. Our portfolio team was discussing a very interesting nuance about the Italian corporate sector this morning that could have substantial impact on the country’s ability to “grow itself out” of its current debt problem. Despite a few well known multi-national names, Italy’s economy is dominated (60%) by small, privately held companies with 20 employees or less. Companies over the years have “held back” their own growth due to strict labor regulations impacting larger firms and a judicial system that is very slow to move. As an example, it can take nearly a year for a company to gain a permit to construct a new production facility, compared to a fraction of that time in the United States. Overall, these “internal” issues are at the heart of the country’s struggle to get its economy growing and its debt profile back in order.
Where is inflation at the moment? Consumer prices increased 0.3% in the month of September, up 3.9% year-over-year due to rising energy prices, which was in line with what the consensus expected. However, core CPI rose a mere 0.1%, its tamest monthly increase since October 2010, as a number of temporary factors which had been pushing core CPI higher in recent months began to subside.
How did economic growth numbers look for the third quarter? 3Q11 GDP came in at 2.5% annualized growth, also in line with consensus expectations. Although wholesale inventories declined in September, the trade deficit was better than expected, which should offset any hits to economic growth from weakness in inventories. Additionally, consumer sentiment continues to move higher after its collapse during the late summer months. The continued improvement in economic data serve as confirmation that the U.S. economy is not in recession, and that moderate economic growth should continue into the fourth quarter.
What is the current status of the Federal Reserve and interest rates? The Fed has engaged in Operation Twist, and will extend the average maturity of its balance sheet by purchasing long-term Treasuries and selling short-term ones. Although they have recognized that economic growth strengthened in the third quarter, the Federal Open Market Committee (FOMC) has maintained the Fed fund rate at 0-0.25%, and stated that they anticipate economic conditions will warrant an exceptionally low policy rate at least through mid-2013.
As always, email me here with your questions or comments. I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.
Senior Vice President
Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.
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