Economic Perspective – January 2014

• The U.S. economy grew more slowly in Q4, according to the Bureau of Economic Analysis’s initial estimate. The 2.6% increase in gross domestic product was roughly half the 5% seen in Q3. The BEA said increased imports, cuts in federal government spending, reduced business investment, and a downturn in exports helped slow economic growth. The major bright spot in the report was a 4.3% increase in consumer spending–the fastest growth since before the financial crisis.
• The addition of 252,000 new jobs in December cut the unemployment rate by 0.2% to 5.6%. According to the Bureau of Labor Statistics, those additions exceeded 2014’s 246,000 monthly average gain. Hourly wages fell 5 cents to $24.57, though they were 1.7% higher than in December 2013.
• Europe got a lot of attention in January. The European Central Bank finally announced a long-awaited quantitative easing program worth at least €1.1 trillion ($1.3 trillion) to try to stimulate the sluggish economy there. Coupled with the Swiss National Bank’s abandoning its cap on the value of the Swiss franc, the decision helped weaken an already struggling euro; at one point, the common eurozone currency was worth less against the U.S. dollar than it had been in 11 years.
• Greece elected a new president, Alexis Tsipras, whose anti-austerity party pledged to renegotiate the terms of bailouts that rescued the country from financial crisis in 2011 and 2013. The potential for confrontation with other European Union countries raised fresh questions about Greece’s financial stability and continued EU membership.
• The Federal Reserve’s monetary policy committee once again said it is in no hurry to begin raising interest rates, in part because it foresees inflation slowing even further in the short term before eventually rising closer to its 2% target. The committee said it expects moderate growth to continue, and its statement expressed little concern about international economic weakness.
• The largest monthly decline in U.S. consumer energy costs since December 2008 was largely responsible for December’s 0.4% drop in the Consumer Price Index; the Bureau of Labor Statistics said consumer prices overall have increased only 0.8% over the last 12 months. Meanwhile, the plunging cost of oil also helped cut wholesale prices 0.3% for the month; the decline–the fourth in the last five months–was the sharpest drop in more than 3 years and left the 12-month wholesale inflation rate at 1.1%.
• After a slow November, sales of new homes were up 11.6% in December, according to the Commerce Department. And existing-home sales bounced back in December; the National Association of Realtors^® said sales rose 2.4% during the month. However, the S&P/Case-Shiller 20-City Composite Index suggested that home prices are showing signs of struggling; the index fell 0.2% in November, and the 4.3% increase over November 2013 was less than the 4.5% annual gain seen the previous month.
• The Commerce Department said durable goods orders unexpectedly fell 3.4% in December–the fourth decline in the last five months. Though a 55% drop in commercial aircraft orders played a significant role in the weakness in new orders, the Commerce Department said business spending on capital equipment also fell 9.7%.

Eye on the Month Ahead

As the new Greek government settles in, investors will be assessing its chances of successfully altering the bailout agreement terms imposed by the so-called “troika”–the European Commission, the European Central Bank, and the International Monetary Fund. The current bailout agreement is scheduled to expire on February 28 unless an extension is granted. And with parts of the United States having been hit hard by two successive major winter storms, investors also may begin to wonder whether bad weather might chill the U.S. economy temporarily, as it did last winter.

Source: Broadridge