Quarterly Economic Perspective – Q1 2015 Review

By
Posted on April 2nd, 2015

  • The Fed has lost its patience. That’s the main headline of the quarter, as the Federal Reserve finally removed long-standing language from its monthly statement of monetary policy that it would be patient about moving away from a near-zero interest rate environment. While this means the Fed is closer to raising interest rates, Fed Chair Janet Yellen indicated any increase wouldn’t happen before June, and in any event not until warranted by economic data. The Fed indicated that rate increases would likely occur later, and at a more gradual pace, than previously forecast due to more moderate growth expectations.
  • The Bureau of Economic Analysis’s final figures confirmed that U.S. growth slowed in 2014’s final quarter, dropping from 5% in Q3 to 2.2%. That meant GDP increased 2.4% over all of 2014. The 4.4% increase in consumer spending was the biggest quarterly gain since the first quarter of 2006, but a 12.2% decline in federal defense spending and a 10.4% increase in imports helped offset it. Meanwhile, a 1.6% drop in the quarter’s after-tax corporate profits (adjusted for inventories and capital consumption) contributed to an 8.3% annual decline for 2014–the worst year for profits since 2008.
  • The U.S. economy added 295,000 jobs in February, which helped cut the unemployment rate from 5.7% to 5.5%. The Bureau of Labor Statistics said February’s job growth exceeded the 266,000 monthly average for the last year. Hourly wages were up 2% from a year earlier.
  • Sales of existing homes rose 1.2% in February (4.2% higher than a year earlier, according to the National Association of Realtors) but ongoing low inventories of homes for sale pushed prices up once again. New home sales also were up by 7.8% in February, and the January figure was revised upward. The Commerce Department said that put sales almost 25% higher than last February, and the 539,000 annual sales rate for new single-family homes hasn’t been that high since February 2008.
  • After 3 months of falling consumer prices, consumer inflation turned up 0.2% in February. The Bureau of Labor Statistics said energy, food, and housing costs all contributed to the monthly increase, which left the inflation rate over the last 12 months essentially flat.
  • A 1.4% drop in February durable goods orders–the third decline in the last four months–confirmed a winter slowdown in the economy. More troubling was a 2.6% slump in business spending on capital equipment.
  • In March the European Central Bank commenced a long-awaited quantitative easing program worth at least €1.1 trillion ($1.3 trillion) to try to stimulate the sluggish economy there. The euro, pressured by QE and uncertainty about Greece, posted the largest quarterly loss versus the dollar since 2008.
  • Greece’s anti-austerity opposition party Syriza, led by Alexis Tsipras, topped vote-getters in January’s parliamentary election and formed a coalition government with another anti-austerity party, the Independent Greeks. The election raised concerns about Greece’s willingness to go along with conditions imposed by its creditors after bailouts in 2011 and 2013, and the possibility of a default and “Grexit” from the eurozone. By March, Greece was struggling to satisfy creditor demands for detailed economic reform plans, in order to qualify for the next round of bailout funds. Reuters reported that without those funds, Greece will run out of money by April 20.
  • China cut its growth forecast for 2015 to 7%; Premier Li Keqiang cited underutilization of manufacturing capacity, slowing investment growth, potential deflation, and the need for increased public spending on social services. Though most developed economies would be thrilled with 7% growth, it’s lower than 2014’s 7.4% increase.

Eye on the Month Ahead

Domestically, all eyes will be on Q1 earnings and, equally important, any forward-looking guidance, to gauge the strong dollar’s impact on future overseas profits. GDP, housing, and labor data will be watched closely to glean any possible clue about the timing of Fed interest rate hikes. Overseas, the Yemen situation, nuclear negotiations with Iran, and Greece’s ongoing negotiations with its creditors will be monitored. Finally, as the “sell in May, go away” season approaches, equities could see continued market turbulence.

 

 

source: Broadridge