While world leaders, capital markets and the general populace are still focused on last week’s vote in the UK and its economic and political impact, life goes on, as they say. Other important economic news, that should be making the headlines, is not right now. Let’s turn our attention to these items for a moment.
First of all, Congress has decided on a solution to the Puerto Rican debt crisis by passing a bill yesterday that President Obama is expected to sign today. The new law may help Puerto Rico avoid defaulting on $2 billion in debt tomorrow (the island has approximately $70 billion in total debt outstanding). Congress has appointed a seven member fiscal oversight board that will help the island restructure its financial obligations and provide oversight to implement needed fiscal reforms. The deal will not cost American taxpayers anything but will likely leave investors in Puerto Rican debt with losses. The oversight board will have powers over budgetary matters on the island and will be empowered to negotiate directly with creditors. There is plenty of dissent regarding this bill, both on the island and among members of Congress. Barney Frank, a Democratic representative from Massachusetts, feels that this bill impinges on Puerto Rican sovereignty and treats the island as a second class colony of the US. Given Puerto Rico’s mismanagement of its own economy, it is hard to see how this deal can be avoided unless US tax dollars are used to bail out the island (not a good idea in our opinion).
In other news, the US Commerce Department released the domestic GDP report on Tuesday and its report on Consumer Income and Spending yesterday. Both were good news for the US economy and may have modestly contributed to the rebound in domestic equities the last two days. GDP grew at a modestly faster pace than initially thought during the first quarter (see table below). The pace was below the long-term trend level for the US economy but the uptick was welcomed. Yesterday, Personal Income and Spending were reported in-line with Wall Street economists’ expectations and were solidly positive numbers. Hopefully this trend will continue. The Fed’s most important gauge of inflation, the Personal Consumption Expenditures (PCE) Deflator ticked down during the first quarter. The Fed will not be happy about this but it will likely keep them from raising their Fed Funds target rate this Summer and Fall. Global equity markets are mixed this morning. The next few weeks should be an interesting ride.
Disclosures: This piece discusses general market activity, industry or sector trends, or other broad-based economic, market , or political conditions and should not be construed as research or investment advice. The opinions expressed are those of the author and do not necessarily represent the opinions of Enterprise Bank & Trust. Past performance is no guarantee of future performance. No diversification strategy can guarantee against loss.