Economic Update

(+) We discussed this already in depth via the mid-week ‘Fed Note,’ but the FOMC elected to taper—on the order of $10 bil. in total (taking the monthly $85 bil. purchases down to $75 bil.).  Per the official statement and Ben Bernanke’s Q&A afterwards (his last as Fed Chair), the focus was on ‘forward guidance,’ which referred to the current intentions of the Fed to keep rates as low as possible for even longer than previously anticipated, despite the tapering, and likely beyond the point where the 6.5% unemployment target is reached—inflation permitting.  This was a change from the previous meeting, and the item which spurred a positive market reaction as expectations for simple tapering either now or in a few months already seemed to be a foregone conclusion, as was the expectation for QE bond-buying to be completed by 2014.  Based on current economic and employment forecasts, the first round of rate hikes appear to be slated for late 2015 to early 2016.

(+) Industrial production was stronger than anticipated for November, showing a gain of +1.1% versus an expected +0.6%.  On the headline side, utilities production rose +4% due to especially cold weather, so can be discounted somewhat.  Manufacturing as a component of overall industrial production (essentially the series without the mining and utilities segments) rose +0.6%, which outperformed forecast by two-tenths of a percent and was led by +3% gains in motor vehicle output, although the non-autos elements themselves gained a half-percent—considered strong across the board.  The October report for manufacturing was also revised upward by +0.5%, which is a positive.  Capacity utilization for November reached 79.0% relative to a median forecast of 78.4%, which is actually the highest level since 2004.

(-) The Empire manufacturing survey for December came in slightly weaker than expected, at a level of +1.0 relative to consensus +5.0, but was an improvement upon November’s -2.2 report.  The underlying elements in the survey were a bit mixed, with the positives being improvements in shipments and new orders (albeit still negative), while employment remained flat and capex expectations for the 6-mo. look-ahead period falling a bit despite staying positive.  Anecdotally, on the qualitative side, survey respondents mentioned employee benefit costs and (interestingly) finding enough qualified workers.  The benefit cost comment is in line with other broader business surveys, especially those for smaller companies; the qualified worker note has been seen a few times (not consistently) in several surveys, and points to an underlying worry of some economists and the Fed in that some unemployment is become structural rather than only cyclical.  This is a topic we’ve touched on in previous reviews.

(-) The Philadelphia Fed index rose a half-point to +7.0 for December, but fell below the expected consensus of +10.0.  New orders, shipments and employment all improved by at least a few points, while only capex plans for the coming half-year fell by 10 points, making this a generally positive report.

(-) The preliminary Markit PMI release for December was slightly disappointing, falling to 54.4 from a revised 54.7 number in November (compared to an expected 55.0).  In the details, new orders and output declined; however, employment rose by just over a point—in essence, the opposite of the pattern we’ve been used to.

(0) The consumer price index for November was unchanged, compared to the forecast of a slight +0.1% increase.  The core CPI component, sans food and energy, rose +0.15%, versus consensus calls for +0.1%.  The largest individual increase over the month was hotel lodging, which gained +3% and reversed an earlier decline, and owners’ equivalent rent gained +0.3%.  Over the trailing 12-month period, the headline and core CPI increased +1.2% and +1.7%, respectively, which are largely unchanged from trend and, of course, still significantly below the Fed’s target level.

(+) The U.S. current account deficit in the 3^rd quarter narrowed a bit, to $94.8 billion (versus expectations of a $100.2 bil. final figure).  The difference was almost entirely accounted for by an improvement in income, as the trade balance for goods/services moved closer into deficit.  To put it into perspective, those figures tend to change by about $2-5 bil. each, so up to 5% of the total.

(+) The nonfarm productivity figure for the 3^rd quarter was revised up from +2.8% to +3.0%, which outperformed forecast (which called for the original number).  Business output rose a percent to just under +5% while the number of hours was unchanged—the total productivity number for the trailing year was a quite low +0.3% and line with the multi-year trend.  Unit labor costs (comp. per hr./output per hr.) were revised down almost a full percent to -1.4% for the quarter, which was on target with what was expected.  Strangely, over the start of the Great Recession and since, we’ve seen a negative correlation between productivity and employment.  The timing of this no doubt is related to the depth of business slowdown during the crisis, but are jobs being eliminated by technology?

(-) Existing home sales fell -4.3% for November, to 4.9 mil., versus an expected lesser decline of -2.0%.  Both main categories were down:  single-family by -4% and condos/co-ops by -8%, and the months supply of homes rose a few tenths to 5.1.  All four major regions of the U.S. experienced weaker sales for November.

(+) The NAHB housing market index gained more than anticipated, from November’s 54 to 58 in December, which beat the forecast of 55.  This changed the momentum from a bit of autumn weakness and re-established another post-recession high.  The details of the report showed gains in current sales, future sales expectations and buyer traffic—so broad-based in that regard.

(+) Housing starts for the past three months were all released together, due to delays from the government shutdown (the impacts sadly continue).  Now old news, the Sept. and Oct. starts were largely flat, but November gained more than expected, +22.7% to 1,091k versus consensus expectations of 955k.  It was the largest single monthly gain since 1990, which was surprising considering the colder weather that month, and showed strength in both single-family (+21%) and multi-family (+27%).  Building permits fell but didn’t do as badly as expected for November, at 1,007k permits compared to the expected 990k result.  Here single-family units gained a slight +2% while multi-family dropped -11%.  These particular data pieces should help 4^th quarter GDP somewhat.

(-) Initial jobless claims for the Dec. 14 ending week rose from 369k to 379k, above the consensus estimate of 336k.  Again, this time of year can be a bit volatile and dependent on the timing of when the holidays occur.  Continuing claims for the Dec. 7 week came in at 2,884k, also a bit higher than the 2,770k expected.

Lastly, the third and ‘final’ estimate of third quarter GDP was tweaked up to +4.1%, compared to the consensus estimate of +3.6% (unchanged from the second estimate released last month).  Encouragingly, personal consumption expenditures were responsible for 80% of the upward revision—services in particular, which was the primary lagging component so far in the recovery (much more so than durable and non-durable goods).  At the same time, the second revision’s large impact of inventory accumulation remained intact, which is less impressive.  The most recent release and over-4% result provides some hope that the economic recovery could be gaining some traction and made the Fed’s taper decision even more appropriate and timely.

What about the 4^th quarter?  Expectations continue to remain on the lower side (2.0-2.5%) although some of the more bullish folks think 3% is possible.  The recent housing starts figures and decent results from various manufacturing surveys this quarter lend some support to this, as does the strong revision for the third quarter.

For 2014, a good number of economists expect stronger results (of course, the more that agree, the more skeptical we should be perhaps).  On average, the estimates for full-year GDP range from 2.5% on the low end to 3.0-3.5% on the more optimistic side (consensus is in the high 2’s).  Even bearish PIMCO upped their forecast to 2.5% or so, which reverses some of their prior bearishness.  The reason is a reduction in public sector drag as well as continual improvements in housing and consumer spending (particularly in services, that had been lagging up until now in the cycle).