Economic “Soft Patch”

Despite record economic stimulus, and perhaps due to the waning of the stimulus programs, May’s economic data indicated a reversal in key expansion criteria. For example, non-farm payrolls, which had been trending in the 220,000 range for the previous three months, came in at 54,000 in May, far below the 180,000 level needed to maintain employment equilibrium. The slack labor data also nudged the unemployment rate up to 9.1%; a reversal of the recent trend. Further disconcerting news came from the housing market, as the S&P Case-Shiller index of national home prices fell 4.2% in the first quarter. Stability in home values has been a crucial component for expansion due to its role as the largest contributor to household wealth. This data is reported against a backdrop of continued unresolved debt challenges in the southern Euro-zone.

With this soft patch in our economy, our investment world focuses on how these types of data shifts impact strategies for cash portfolios as companies look to balance yield, liquidity and risk. We believe investment strategies should evolve with the economic backdrop, as opportunities and risks shift with the economic cycles. In today’s environment (with the likely postponement of higher short term rates), the most common strategy shift is to seek average maturity extensions. Similar shifts also can be seen in money market fund statistics, however, extension opportunities in money funds are significantly restricted by the new 60-day weighted average maturity limit, as prescribed under SEC Rule 2a-7.

What else should you consider? These days, it may be prudent to employ a separate account strategy to take advantage of higher yield opportunities. Effective liquidity planning helps identify extension opportunities in separate accounts, and separate account strategies further allow for precise credit management. Furthermore, given the recent turmoil in Greece, control over your credit exposure is as important as ever.

Given these shifting opportunities, this month we are focusing our research on what this current soft patch in economic growth could mean to treasurers and their evolving investment strategies.

Best Regards,

Ben Campbell
President & CEO