Economic Perspective: January 2013

The Month in Review

• After passing legislation that avoided a plunge off the fiscal cliff, Congress began working on ways to avoid hitting the debt ceiling in February. Investors began assessing the impact of the American Tax Relief Act of 2012, which permanently extended most tax rates and added a new one, made capital gains rates permanent and added a new rate for the wealthiest taxpayers, postponed spending cuts, and extended certain tax provisions, either permanently or temporarily. By month’s end, Congress had agreed to suspend the debt ceiling temporarily until May without requiring spending cuts, though lawmakers’ paychecks would be withheld if their chamber of Congress doesn’t pass a budget resolution by April 15.
• Hampered in part by fiscal cliff fears and Superstorm Sandy, the U.S. economy slowed substantially in 2012’s final quarter. According to the initial estimate, gross domestic product contracted at an annual rate of 0.1%. That’s dramatically lower than Q3’s 3.1% growth, and is the first quarter of contraction since Q2 2009. A 22% decline in defense spending, lower state/local government spending, and reduced inventories and exports were major contributors to the contraction, according to the Commerce Department. The GDP figure is subject to two revisions over the next two months.
• The unemployment rate remained unchanged at 7.8%, according to the Bureau of Labor Statistics’ January report for December 2012. The economy created 155,000 new jobs, roughly the same as its 2012 monthly average.
• As European unemployment hit a new record of 11.8%, the International Monetary Fund forecast 3.4% global growth in 2013 (2% in the United States and a 0.2% contraction in Europe). However, it also said a European recovery could push global growth to 4.1% the following year.
• As Treasury Secretary Timothy Geithner departed, President Obama nominated White House chief of staff Jacob Lew to replace him. He also chose former federal prosecutor Mary Jo White to head the Securities and Exchange Commission and renominated the acting head of the Consumer Financial Protection Bureau, Richard Cordray.
• Sales of both new and existing homes fell in December, though both were up substantially from the year before and long-term trends continued to improve. The Department of Commerce said new home sales were down 7.3% for the month, while the National Association of Realtors® saw a 1% drop in December’s home resales. Home prices in the 20 cities measured by November’s S&P/Case-Shiller index also fell 0.1%; though prices were 5.5% higher than a year earlier, the index was still 30% below the market’s 2007 peak. Meanwhile, an $8.5 billion settlement with 10 mortgage servicers was expected to help speed review of a backlog of faulty mortgage foreclosures.
• Inflation remained tame at both the consumer and wholesale levels as falling gas prices helped offset increases in the cost of food and shelter. The Bureau of Labor Statistics said the annual consumer inflation rate for the last 12 months was 1.7%, while the wholesale rate was 1.3%.
• Retail sales rose 0.5% in December, in part because of strong auto sales, and were up 4.7% from a year earlier, according to the Commerce Department. Personal incomes jumped 2.6% in December, though one-time factors such as accelerated payment of corporate dividends and bonuses accounted for much of the increase. The personal savings rate also rose dramatically, going from 4.1% of disposable income in November to 6.5% in December; that’s the highest savings rate since the spring of 2009.
• U.S. manufacturing bounced back from a November contraction. Industrial production was up 0.3% in December, and the Fed said it would have been higher if not for the weather. Also, the Institute for Supply Management’s gauges of manufacturing and the services sector both showed continued expansion.

Eye on the Month Ahead

With the threat of a February Treasury default averted, investors will now focus on the upcoming budget debates and the sequestered spending cuts now scheduled to take effect March 1. Economic data will suggest whether the economy will shake off Q4’s slump, as will the remaining weeks of earnings season.

Key dates and data releases: unemployment/payrolls, construction spending, U.S. manufacturing (2/1); factory orders (2/4); U.S. services sector (2/5); labor productivity/costs (2/7); international trade (2/8); retail sales, business inventories (2/13); industrial production, options expiration (2/15); wholesale inflation, housing starts, FOMC minutes (2/20); consumer inflation, home resales (2/21); new home sales, home prices (2/26); durable goods orders (2/27); 2nd estimate of Q4 GDP (2/28).