Economic Perspective – Feb 2013

The Month in Review

• U.S. economic growth for the fourth quarter of 2012 wasn’t as bad as the Commerce Department’s initial estimate. The department’s revised estimate showed gross domestic product up 0.1% rather than down by that amount; the final figure will be announced in April. The number is still dramatically lower than the previous quarter’s 3.1%. Lower defense spending, local and state government cutbacks, and reduced inventories and exports offset increased home construction and consumer spending.
• Businesses added 157,000 new jobs in January, according to the Bureau of Labor Statistics’ February report for January. However, unemployment edged upward slightly to 7.9%. The unemployment rate has now remained within one-tenth of a percentage point of that level since last September.
• The eurozone’s GDP fell by 0.6% in Q4 2012, and was 0.9% lower than a year earlier. The European Commission (the eurozone’s executive body) forecast a 0.3% contraction in the eurozone this year, and only 0.1% growth for the entire European Union, though it expects expansion in 2014. In Italy, the defeat of Prime Minister and austerity advocate Mario Monti raised questions about how the country’s parliament will form a coalition government and whether new elections would be needed soon.
• The Federal Open Market Committee reaffirmed its plan to continue buying bonds, but directed its staff to report at the March meeting on options for winding down purchases whenever employment reaches an acceptable level.
• Home prices in the 20 cities measured by the S&P/Case-Shiller index were up in December; the 0.2% increase made 2012’s 6.8% gain the best calendar-year growth since 2005, though the average price nationally is still almost 30% below its 2006 peak. Also, sales of new homes soared 15.6% in January; the Commerce Department said sales were at their highest level since July 2008 and almost 29% higher than a year earlier. Meanwhile, home resales also were up 0.4% in January, according to the National Association of Realtors®, and tight inventories helped push the median resale price up 12.3% from a year earlier. New home construction, while 23.6% higher than the previous January, fell 8.5% during the month, though building permits for single-family homes rose 1.9%.
• Consumer inflation remained unchanged in January at an annual rate of 1.6%. However, the Bureau of Labor Statistics said a 39% jump in the cost of vegetables during the month helped push wholesale food prices up 0.7% in January, putting the annual wholesale inflation rate at 1.4%.
• U.S. retail sales bumped up 0.1% in January despite slippage in auto sales; the Commerce Department said sales were 4.4% ahead of the previous January.
• The U.S. trade deficit shrank to its lowest point in almost three years as a result of record December oil exports. According to the Commerce Department, the trade deficit fell more than 20% to $38.5 billion. A nearly 20% reduction in defense spending on aircraft was largely responsible for the first decrease in new durable goods orders in five months. Though durable goods orders overall declined 5.2%, the Commerce Department said non-transportation orders were up 1.9%.
• American Airlines and U.S. Airways agreed to form the world’s largest airline, and Berkshire Hathaway joined a private equity firm in plans to acquire H.J. Heinz. However, the purchase of a substantial amount of Heinz call options the day before the acquisition was announced prompted SEC and FBI investigations of possible insider trading through a Swiss account.
• The U.S. Justice Department filed suit against Standard & Poor’s, charging that its ratings of certain mortgage-backed bonds prior to October 2007 were deliberately inflated.

Eye on the Month Ahead

Investors will keep an eye out to see whether federal budget cuts scheduled to start taking effect this month will begin to hurt the economy, and how governmental operations might be affected by expiration of the current funding bill on March 27. This month’s Federal Open Market Committee will focus on how and when to wind down quantitative easing, and its March 20 announcement will be closely watched. In Europe, investors will want to see whether Italy’s political parties can form a functional coalition.