Economic Perspective – May 2014

The Month in Review

• The U.S. economy contracted at an annualized rate of 1% during Q1 2014; the Bureau of Economic Analysis said it was the weakest growth rate in three years. Consumer spending was up 3.1% during the quarter, but couldn’t offset the impact of higher imports and declines in capital investments and spending by state and local governments.
• The unemployment rate saw its biggest drop since December 2010, falling from 6.7% to 6.3%; that’s the lowest it’s been since September 2008. Also, the Bureau of Labor Statistics said the number of new jobs created–288,000–was far greater than the last 12 months’ 190,000 monthly average and represented the strongest job creation in more than two years. However, the report wasn’t all good news; the drop in the unemployment rate also resulted partly from 806,000 people leaving the labor force.
• Warmer weather helped cut heating costs, which the Commerce Department said was a key reason for the first monthly decline in consumer spending in a year. The Commerce Department’s May report also showed retail sales flattening out despite a 0.3% increase in consumer prices that put the consumer inflation rate for the last 12 months at 2%. The Bureau of Labor Statistics said wholesale prices also rose at a rapid pace; the 0.6% increase was the biggest monthly gain since September 2012.
• Manufacturing data was mixed. Durable goods orders saw their third straight monthly increase, with defense-related spending on transportation the most significant factor. However, business spending on capital equipment was down 1% for the month. And after two straight months of increases, the Federal Reserve’s measure of industrial production fell 0.6%. However, the Institute for Supply Management’s manufacturing survey showed expansion accelerating.
• As more homeowners put their houses on the market in April, the National Association of Realtors^® said sales of existing homes saw their first monthly increase of the year, rising 1.3%. The Commerce Department’s measure of new home sales also jumped 6.4%. However, both numbers were lower than a year earlier. Meanwhile, prices in the 20 cities tracked by the S&P/Case-Shiller 20-City Composite Index were up 0.9% and housing starts rose 13.2%, with a nearly 43% increase in apartment construction leading the way. Meanwhile, the average rate for a 30-year fixed-rate mortgage fell to 4.12%. Mortgage giant Freddie Mac said that’s the lowest it’s been since last October, though it’s still higher than last May’s 3.81% (an increase that has been cited as one reason for recent sluggishness in the housing market).
• A Pennsylvania federal grand jury charged five members of a Chinese military unit with stealing industrial secrets by hacking computers at six U.S. enterprises in the nuclear, solar, and metals industries. The indictment is said to be the first involving a governmental body rather than an individual corporation.
• The eurozone economy grew 0.2% during Q1, roughly the same pace as the previous quarter, while the 0.3% growth in the 28-member European Union was slightly less than in Q4 2013. The inflation rate in both areas rose slightly to 0.7% in the eurozone and 0.8% for the EU, allowing the European Central Bank to leave its key interest rate unchanged at 0.25%.

Eye on the Month Ahead

As summer gets under way, investors will watch to see whether signs of revived economic momentum can be sustained. Housing data will be key to the Fed’s continued winding down of its bond purchases.

Source: Broadridge