Quarterly Economic Perspective – Q3 2013

• Contrary to speculation that the Federal Reserve would begin tapering its economic support in September, the Fed’s monetary policy committee postponed any reduction in its $85 billion monthly bond purchases. The committee said it wants more evidence that the economy is strong enough to survive potential threats from higher mortgage rates and fiscal wrangling in Washington.
• U.S. economic growth accelerated in the second quarter; the 2.5% annualized growth rate was more than double Q1’s 1.1%. The Bureau of Economic Analysis said the primary contributors to the increase were higher consumer spending, improved exports, larger business investments in buildings and inventories, and more residential construction. After falling 0.1% in Q1, after-tax corporate profits rose almost 3.5% during Q2 and were up 6.4% from Q2 2012.
• The unemployment rate fell to 7.3%, its lowest level since December 2008. However, the news was not entirely good; the Bureau of Labor Statistics said that though the economy added an average of more than 148,000 jobs between June and August, that was lower than the roughly 182,000 new jobs created in Q2 or the 207,000 monthly average of Q1. Also, part of the decline in the unemployment rate was the result of roughly 1.4 million people leaving the labor force.*
• The housing market showed signs of being affected by higher mortgage rates as mortgage lender Freddie Mac said the rate for a 30-year fixed-rate loan hit a two-year high of 4.58% in August. Though that was still relatively low from a historical perspective, sales of both new and existing homes had begun to cool by the end of the quarter. However, both were still much stronger than a year earlier; the National Association of Realtors® said home resales hit their highest level in more than six years, and new home sales were up 12.4% over the last 12 months. Housing starts also saw gains, ending the quarter 19% ahead of the same time last year, though building permits showed signs of weakness.
• U.S. industrial production was up 2.7% from a year earlier, according to the Federal Reserve, and the Institute for Supply Management said its gauges of both manufacturing and services industries hit multiyear highs. However, after rising in July to their highest level since 1992, durable goods orders showed signs of slowing as businesses cut spending on capital equipment after five straight months of increases.
• Inflation remained well within the range the Federal Reserve considers acceptable. According to the Bureau of Labor Statistics, after picking up slightly during the summer, consumer inflation moderated to end the quarter at a 1.5% annual rate, while the annual wholesale inflation rate for the last 12 months was slightly lower at 1.4%. Strong car sales were a major contributor to an increase in retail sales, which saw their fifth straight monthly increase in August, and by the end of the quarter, both personal incomes and inflation-adjusted consumer spending had risen every month since January.
• Detroit became the largest U.S. municipality ever to file for bankruptcy, while Verizon’s sale of $49 billion of bonds set a record for the largest single sale of corporate debt in U.S. history.
• After an 18-month recession–the longest in its almost 15-year history–the eurozone’s economy finally saw some improvement, growing 0.3% in Q2. The European Central Bank now sees the eurozone contracting slightly less in 2013 (-0.4%) than previously forecast. Also, German Chancellor Angela Merkel’s reelection effectively reinforced continued support for weaker eurozone members. Meanwhile, data on China’s economy was mixed; government figures showed a rebound in manufacturing while the equivalent of the Fed’s “beige book” report suggested that the economy might be starting to slow.

Eye on the Month Ahead

Key dates and data releases: U.S. manufacturing, construction spending (10/1); factory orders, U.S. services sector (10/3); unemployment/payrolls (10/4); balance of trade (10/8); Federal Open Market Committee minutes (10/9); wholesale inflation, retail sales (10/11); Empire State manufacturing survey (10/15); consumer inflation, Fed “beige book” report, international capital flows (10/16); housing starts, industrial production, Philly Fed manufacturing survey (10/17); leading economic indicators (10/18); home resales (10/21); new home sales (10/24); durable goods orders (10/25); home prices (10/29); Federal Open Market Committee monetary policy announcement, initial estimate of Q3 gross domestic product (10/30).

Source: Broadridge