Weekly Economic Update

The week was highlighted by a fair number of important industrial reports, as well as the closely-watched Fed meeting.  Unfortunately, there wasn’t enough decent news to offset emerging market-led concerns.

(+/0) As we recapped separately mid-week, the FOMC continued the taper, with an additional $10 bil. reduction in quantitative easing bond purchases.  Language about conditions and business/consumer spending was generally more optimistic, which goes along with recent actions.  Now, we’re down to $65 bil./mo. with more on the way, dependent on data.  If this same rate is sustained, the committee is on track to finish all purchases by October.  However, the ‘forward guidance’ for low rates and a generally accommodate policy remains intact, assuming inflationary levels remain low, since employment and economic targets have yet to be reached.

(0/+) The advance estimate of U.S. real GDP for the fourth quarter was released, showing a +3.2% gain (on target with consensus expectations).  At the same time, some underlying figures were a bit weaker than that implied by the headline.  Business fixed investment rose almost +4%, led by a strong +7% gain in equipment but tempered by a -1% decline in structures investment.  Business inventories rose +0.4%, while net exports added over +1.3% to the overall GDP figure, which is significant.  On a household level, personal consumption expenditures rose +3.3%, the best in over three years, but still lagged expectations by about a half-percent.  Residential investment (housing) fell -10%, which we largely expected with lackluster housing figures over the last few months.  Federal spending fell -13%, which trimmed a percentage point from the final GDP number.  Speaking of which, in the release, the Commerce Dept. added that the government shutdown during the quarter trimmed about -0.3% off of potential growth, but this was only an estimate.

Of course, before we make too much of this, the second and third estimates may and often do contain significant revisions, but this was a decent start.  Based on early estimates, the first quarter of this year looks to be quite similar in terms of magnitude, but often inventory contributions tend to be the swing factor (a few tenths of a percent are either allocated to the previous quarter or pushed out to the next one, based on manufacturing conditions and the calendar), so early estimates point to first quarter 2014 GDP potentially coming in a few tenths lower than that of the fourth quarter.

(0) Personal income for December was flat, as wages/salaries underwhelmed the expected +0.2% increase.  Consumer spending, on the other hand, gained +0.4%, double what was expected; however, some revisions for previous months during the quarter took off a few tenths.  The savings rate fell almost a half-percent to 3.9%, which is low relative to recent years and far lower than the 5+% readings from prior decades—some of this is cyclical, while a good majority reflects demographic trends (an aging society drawing down assets as opposed to accumulating tends to depress this rate).

(0) Both the headline and core versions of the PCE price index for December rose in line with expectations at +0.2% and +0.1%, respectively—the difference between the two being a +2% rise in energy prices.  Over the past year, the headline/core are up +1.1% and +1.2%, which again reaffirm a very mild inflationary environment.

(0) On to another inflationary gauge, the employment cost index for the 4th quarter rose +0.5%, which was both a tick higher than forecast and compared to the previous quarter.  Wages/salaries and benefit costs both rose at the same rate.  For 2013 as a whole, compensation costs rose +2.0%, which was just a tick higher than 2012.  So, again, wage pressures are contained but something we monitor more closely than some other inflation measures as they tend to be early indicators.

(-) Durable goods orders for December fell -4.3% on a headline level, which strongly disappointed relative to the anticipated gain of +1.8%.  Removing the more volatile components resulted in better readings—of -1.6% for orders ex-transport and -1.3% on the ‘core’ goods orders—but these also underwhelmed relative to the small increase (+0.1%) forecasted.  However, November core orders were also revised down a percent-and-a-half to 2.6%, which added additional negativity to the report.  Defense orders and non-military aircraft orders were big detractors from the headline number (both fell in the -20% range), while computer/electronics products orders fell -8%.

(+) The January Chicago PMI report came in at 59.6, down from 60.8 in December, but a bit better than the expected 59.0 reading.  Long-story short, growth continues to look strong by this metric.  New orders and production were up on the month, while employment declined sharply for the second straight month.

(+) The S&P Case-Shiller home price index of twenty major American cities declined -0.1% for November—the first decline in a year—while on a seasonally-adjusted basis, the loss turned into a gain of +0.9%, so it all depends on how you care to look at it.  The biggest gains for the month were in Miami (which gained +1.4%), but at least half the cities experienced a decline on the month (again, non-seasonally-adjusted…if seasonal adjustments were taken into account, every city gained).  Smoothing these things out, the twelve-month gain remained quite strong at +13.7% for the index and every city registered at least a 6% gain or better (the lowest being New York and Cleveland, the best being Las Vegas, LA and San Francisco with +25% gains).

(-) New home sales for December dropped -7.0%, far weaker than the anticipated -1.9% decline; in addition, sales for October and November were revised downward.  The regional results were quite divergent:  sales in the Midwest rose +18%, while the Northeast declined -36% and South and West segments of the nation fared in line with the averages, down -7% and -9%, respectively.  This volatility is likely partially due to this period being the weakest of the year on top of extreme weather over the month.  At the same time, real estate inventory has fallen to its lowest levels in June.

(-) Pending home sales also fell for December, by a rate of -8.7%, compared to a minor expected decline of -0.3%.  This was one of the larger declines in about three years.  Metrics were lower across the four major regions, being a little worse in the Northeast and West (down -10%) and a bit better in the Midwest (down -7%), but not much differential to speak of.  Unfortunately, this likely signifies poor existing home sales results for coming months (per the National Association of Realtors, 80% of pending sales become ‘existing’ sales within two months).

(+) The Conference Board consumer confidence survey for January came in a bit better than the anticipated 78.0, moving up to 80.7, which is yet again close to a post-recession peak.  Under the hood, consumer assessments of present conditions and future expectations moved up several points.  As an aside, consumer confidence in the European Union has also shown improvement.  Many countries remain in negative territory and are behind readings in the U.S., but have steadily improved over the past year.  Measures in U.K., Ireland and Sweden are currently strongest, while Spain, Italy and France remain the worst of the larger EU nations (the French reading is somewhat surprising, but perhaps not when political sentiment is included).  Confidence in Portugal in Greece remain horrible (as in -50 readings…hard to fathom here), but have improved there as well.  Some of this should probably be taken into context as Europeans may have a different and more skeptical view about their economies and political conditions in general than we’re used to.

(+) The Univ. of Michigan consumer sentiment survey for January came in at 81.2, which was slightly better than expectations of 81.0 and the preliminary reading of 80.4.  Like the Conference Board’s version, consumer assessments of current conditions and future expectations both improved a little bit.  In terms of inflation, the 1-year expectation rose a tick to 3.1%, while the 5- and 10-year look-ahead guesses were just under at 2.9%.

(-) Initial jobless claims for the Jan. 25 ending week rose almost 20k from the prior week to 348k, underperforming the 330k estimate.  No special one-offs or other factors appeared to be the cause.  Continuing claims for the Jan. 18 week fell a bit to 2,991k, a bit better than the expected 3,000k.

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