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Statistics released in February indicated that the U.S. economy continues to generally improve, though labor markets have yet to show consistent progress and housing remains a hindrance. Stock markets rallied for the month despite escalating tensions in Egypt, Lybia, Tunesia and Oman that have driven oil prices considerably higher. Domestically, several FOMC members have suggested that they may vote to cut short QE2’s asset purchases before they reach the $600 billion target or the projected June expiration date, fearing inflation prospects. Bernanke is slated to deliver his semi-annual monetary policy update to Congress this week; markets will watch closely for any updates on the duration of the current quantitative easing campaign.
Residential Housing Signs of improvement continue to elude the residential housing market since the expiration of the first-time and existing home buyer tax credits last April. January single-family housing starts fell 1.0% to the lowest level since May 2009, while building permit applications, an indicator of future construction activity, sank 10.4%. New home sales managed an increase in the Northeast and Midwest in January, but dropped 13% overall, with much of the decline driven by the expiration of a $10,000 tax credit in California that had propelled sales higher in December. The median price of a new home was up 5.7% compared to a year earlier. Existing home sales grew 2.7% in January, more than expected, and the number of homes for sale declined, bringing the inventory down to a 7.9 month supply at the current pace of sales from 8.1 months. Distressed sales, however, accounted for 37% of all sales – up from 36% in the previous month – suggesting that future housing market improvement is likely to be sporadic. Spending In its second reading of Q4 GDP, the government reported that the economy expanded at a 2.8% annualized pace, nearly a half-point below the previous estimate of 3.2%, but still higher than Q3’s 2.6%. Inventories subtracted 3.7% from growth, more than previously estimated. Consumer spending grew 4.1% on the quarter, also slower than the previous estimate, but final sales (which includes all categories minus inventory growth) surged 6.7% – the best in 13 years. Personal spending in January grew 0.2%, the smallest in 6 months, after growing a downwardly-revised 0.5% in December. Both major gauges of consumer confidence expanded in January. The University of Michigan’s final February gauge of consumer sentiment rose to a 3-year high of 77.5 from 74.2 in the previous month, and the measure of expectations for six months in the future, grew to 71.3 from 69.3. The Conference Board’s measure of February consumer confidence also reached a 3-year high, rising to 70.4 from 64.8. Retail sales rose for the seventh consecutive month, though January’s 0.3% improvement was the smallest of the seven. Sales less autos, gasoline and building materials, the figure used in the calculation of GDP, grew 0.4%. Consumer credit surged $6.1 billion in December, as revolving debt, such as credit card debt, grew for the first time in 28 months. Recent data from the manufacturing sector has shown strength for several months. In January, the ISM manufacturing index grew to 60.8, indicating the fastest rate of expansion in 6 years. The Chicago Purchasing Managers Index for January was expected to ebb slightly after touching a 20-year high in December, but it managed to accelerate further to 71.2. Orders for durable goodsjumped 2.7% in January, but the increase was largely attributed to a gain in typically-volatile commercial aircraft orders. Net of transportation orders, durable goods orders were down 3.6%. The trade deficit grew 5.9% in December to $40.6 billion on the back of rising oil prices, capping a 32.8% expansion in the trade deficit for all of 2010, the most in a decade. The ISM’s non-manufacturing index for January grew to 59.4 from 57.1, the highest since August 2005, marking the 13th consecutive month of readings above 50. The ISM non-manufacturing index is said to capture about 90% of U.S. economic activity. Labor Market The unemployment rate unexpectedly fell to 9.0% in January despite non-farm payrolls increasing by only 36,000 – more than 100,000 fewer jobs than had been expected. The disparity is thought to arise from the effects of severe winter storms during the month; the payrolls figure counts those not working because of weather as unemployed, while the unemployment rate figure does not. The underemployment rate, which includes people who have given up looking for work and those working part-time for economic reasons, fell to 16.1% from 16.7%. Average hourly earnings increased eight cents to $22.86. Initial jobless claims fell somewhat in February compared to January totals, with the four-week average now at about 400,000, suggesting slow improvement in employment markets. The employment component of the ISM non-manufacturing index provided more optimism though, as it grew to 64.9, the highest in seven years. Inflation Overall price pressures remain well below the Fed’s targets, although oil prices have increased sharply in recent weeks due to political unrest in Northern Africa and the Middle East. The consumer price index (CPI) rose 0.4% in January, matching December’s revised increase, though core CPI grew by a more modest 0.2%. Core CPI was up just 1.0% over the past 12 months, while overall CPI grew 1.6%. The producer price index jumped 0.8% in January on the surge in energy prices, and core PPI also notched a significant acceleration at 0.5%. Core PPI is up 1.6% compared to a year earlier. The Fed’s preferred inflation gauge, the core personal consumption expenditures index, grew by only 0.1% in January and 0.8% over the past 12 months. The next FOMC meeting is scheduled for March 15th. Market participants do not anticipate changes to the overnight rate target until 2012, but will watch closely for signals indicating any change to the pace or duration of QE2.
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