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The US economy expanded at the fastest pace in over six years during the fourth quarter, gaining 5.7% on an annualized pace. Even with this large jump, the economy shrank 2.4% in 2009, which is the worst yearly performance since 1946. With 2009 behind us, Americans are hopeful that we can avoid a double dip recession in 2010 and optimistic that we will see sustained economic growth, especially in the housing and labor markets. The FOMC, which met on January 26th and 27th, reiterated their earlier comments that conditions "are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” but expressed a cautious optimism regarding the future outlook. Overall, economic data released in January were mixed as the housing market retreated, the labor market saw another month of job losses, albeit at a slowing pace, and retail sales unexpectedly fell. On the bright side, manufacturing continues to expand as a weak dollar keeps the demand for US goods strong.
Residential Housing December housing data suggests recent stabilization is dependent on continued government support even as mortgage rates remain at extremely low levels. Overall, residential fixed investment rose 5.7% during the fourth quarter after an 18.9% surge in the third quarter. Housing starts dropped 4.0% in December and existing home sales plummeted 16.7% as builders and buyers alike rushed to complete transactions before the first-time home buyer tax credit was scheduled to expire on November 30th. Subsequently, a five month extension of the tax credit to April 2010 likely caused building permits to jump 10.9% in December. The median existing home price dropped 12% to $173,500 year-over-year, while home purchases were up 4.9% in the same period. New home sales sank by 7.6% in December and a record 23% for all of 2009, but the supply of new homes on the market fell to the lowest level in 38 years. Spending Recent data on the consumer front points to a choppy recovery as we begin 2010. Personal spending increased by 0.2% in December after a 0.7% increase in the previous month, and personal incomes rose by 0.4% during the same period. The University of Michigan’s January gauge of consumer sentiment grew to 74.4 and the Conference Board’s consumer confidence reading climbed to 55.9, suggesting consumers are cautiously optimistic about the direction of the US economy. U.S. retail sales unexpectedly dropped 0.3% in December after a 1.8% surge in November, while consumer credit contracted for the tenth straight month in November and access to revolving debt continues to tighten. On the business side, recent data continues to indicate stabilization and possible growth in business spending and the manufacturing sector. The ISM Manufacturing index grew for the fifth consecutive month in December, rising to 55.9 from a reading of 53.6 in November. The Chicago Purchasing Manager’s Index also remained in expansion mode by climbing to 61.5 in January, the highest level since November 2005. Durable goods orders gained in December, increasing 0.3% while orders for non-defense capital goods excluding aircraft, a proxy for future business investment, surged by 1.3%. Shipments of such goods, a tally used in the calculation of GDP, grew 2.2% last month after climbing 0.8% in November. Finally, the U.S. trade balance grew by 9.7% in November. Imports increased 2.6% while exports only climbed at a 0.9% pace. Labor Market Although job losses seem to be easing, the December employment report showed the labor market is still contracting. The December unemployment rate remained at 10.0% as non-farm payrolls dropped by 85,000 compared to the consensus estimate of zero losses or gains. This report also showed 661,000 people exited the workforce and the “underemployment rate” surged to 17.3%. Another leading gauge of the labor market, initial jobless claims, showed signs of improvement as claims fell to 450,000 for the week ending January 23rd. The four-week moving average of initial claims rose to 446,750. Inflation Overall price pressures remain contained, giving the Federal Reserve plenty of leeway to fine tune monetary policy at its own pace. The consumer price index rose 0.2% in December, while core prices, which exclude volatile food and energy prices, rose a meager 0.1%. In the same period, the producer price index increased 0.2% and core prices rose remained flat. Compared to a year earlier, core consumer prices are up 1.8% while core wholesale prices have risen 0.9%. Finally, the core personal consumption expenditures gauge increased 0.1% in December and gain 1.5% over the past year, right at the bottom of the Fed's preferred range of 1.5% to 2.0%. The next FOMC meeting is scheduled for March 16th, and in light of moderate economic improvements, the door is slightly open for the Fed to modify their key phrases of “exceptionally low” interest rates for “an extended period” of time as a precursor to possible rate increases in the latter half of 2010.
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