Economic Perspective (May 2013)

• The U.S. economy grew 2.4% during the first quarter of 2013–a fraction less than the Bureau of Economic Analysis’s 2.5% initial estimate but still an improvement from the previous quarter’s 0.4%. Business inventories and exports grew slightly less than previously thought.
• The unemployment rate continued to inch downward in April, according to the Bureau of Labor Statistics. The 165,000 new jobs created during the month cut the unemployment rate to 7.5%, its lowest level since December 2008. The loss of 11,000 government jobs partly offset the private sector’s 176,000 new jobs.
• The housing market continued to rally. Home prices in the 20 cities measured by the S&P/Case-Shiller Index were 10.9% higher than a year earlier. That was the strongest annual growth since 2006, and it put prices back at late 2003 levels. New home sales saw their strongest increase since July 2008 as a 2.3% jump in April put sales 29% ahead of a year earlier, according to the Commerce Department. However, the National Association of Realtors® said limited inventory and tight credit continued to constrain sales of existing homes, though sales were up 0.6% for the month and 9.7% from a year ago. Meanwhile, housing starts fell 16.5% for the month but were still more than 13% higher than last April.
• Inflation showed no signs of putting pressure on the Federal Reserve to raise interest rates. For the second straight month, falling oil prices led to a drop in the Consumer Price Index. According to the Bureau of Labor Statistics, the 0.4% decline was the steepest since December 2008, and it pushed the annual consumer inflation rate to 1.1%, its lowest level since November 2010. Meanwhile, wholesale prices fell 0.7%, cutting the wholesale inflation rate for the last 12 months to 0.6%.
• Retail sales were up 0.1%, and for a change, higher gas prices weren’t the cause. The Commerce Department said building materials/garden supplies, auto/auto parts, clothing, general merchandise, and nonstore retailers all gained at least 1%.
• Manufacturing data was mixed. Durable goods orders rebounded from the previous month’s sharp decline with a 3.3% gain. However, both the Federal Reserve’s Empire State and Philly Fed manufacturing surveys showed general business conditions declining during the month, and the Institute for Supply Management’s gauges of both manufacturing and services sector activity showed slower growth.
• The Federal Reserve said it will continue its bond purchases. However, it may increase or decrease the monthly amount depending on economic conditions, and some members of the monetary policy committee have suggested starting to wind them down as early as June. Meanwhile, with eurozone unemployment at a record 12.2%, the European Central Bank cut its key interest rate to 0.5% to try to stimulate the continent’s contracting economy.

Eye on the Month Ahead

As the Fed continues to debate when to begin easing out of its shopping spree in bonds, speculation about monetary policy will likely continue to play a key role in both the equities and bond markets. Overseas, any fresh European Central Bank action and a summit on European unemployment will be a focus, as will Japan’s troubles. And quadruple witching options expiration could prompt some volatility as the second quarter winds down.