Economic Notes – February 4, 2013


Written by: Jon McGraw

With employment, ISM and GDP all in the news, last week was one of the higher-profile reporting weeks in some time.

(0) To set the tone, the Federal Open Market Committee met mid-week and no changes in policy were announced (see last Wednesday’s special note) and the theme remained accommodative, as expected. The statement addressed the continued challenges in the economy—continued high unemployment and last quarter’s negative effects from Hurricane Sandy and uncertainty surrounding the fiscal cliff. However, it also acknowledged the lessened strains in global financial markets and an improvement in the economic outlook in the form of business fixed investment in the U.S. Still, the Fed remains in easing mode and continued the treasury/mortgage bond-buying program and low interest rate policy with a stated goal of 6.5% unemployment up to a limit of forward-looking 2.5% inflation. Now, questions revolve around when an eventual exit strategy will occur from this extraordinary level of stimulus. The ‘stable prices’ mandate may necessitate this before the ‘maximum employment’ mandate will.

(-) The preliminary estimate of real GDP for 4th quarter 2012 was released—the result being negative growth of -0.1%, which was even lower than already-tempered expectations for a +1.1% annualized gain. The two primary factors accounting for the poor early result were government defense spending (which fell at a -22% annualized rate) and inventory investment (both of which, when combined, took -2.6% away from the total nominal number). Of course, concerns about the fiscal cliff sequester certainly played a role in spending and overall sentiment during the quarter. But, there were some bright spots, as personal consumption spending rose at a rate of +2.2% and business fixed investment rose +8.4%.

Despite the disappointment, it’s important to remember that this preliminary release contains very early and less reliable data, and is subject to additional revisions as figures are fine-tuned. Keeping in mind how large the U.S. economy is, all of this data represents estimates of one kind or another, and isn’t as reliable or precise as we’d ideally like them to be.

Several economic strategy groups we receive information from (including Goldman Sachs, Deutsche Bank, Morgan Stanley and others) are of the opinion that weakness from Q4-2012 may carry over into strength during Q1-2013 if/when some of the current policy concerns are ironed out. This coming quarter, a real GDP reading of 1.5-2.0% does not seem to be out of line—as lackluster as that is—while a bit of growth acceleration may be in the cards for the second half of the year. The Q3/Q4-2013 expectations are largely based on several macro factors: continued ‘healing’ of U.S. and global economic conditions post-crisis, continued improvement in manufacturing activity, the debt crisis abating in Europe, better emerging market growth and, in the U.S., compromise solutions to the fiscal cliff and debt ceiling issues that have, again, surfaced as threats to near-term sentiment.

(+) The ISM manufacturing index gained more than expected in January, up to 53.1 versus the forecast 50.7. Forward-looking new orders rose, as did production and employment, so it was a well-balanced report in that regard. Inventories also rose, which was a big part of the overall ISM increase. The ISM is always closely watched by markets.

(0) Durable goods orders gained +4.6% for the month of December, versus a +2.0% increase expected by analysts. The biggest factor in the report was a strong increase in non-defense aircraft orders (related to Boeing orders during the month). Removing this more volatile industry component, the ex-transportation index rose +1.3% (which was still better than an expected +0.8% rise). Core shipments of capital goods rose by +0.3%, which lagged expectations by roughly one-half percent, but was offset by a prior month revision—so a wash.

(+) The Chicago Purchasing Managers’ index for January rose to 55.6, which bested the expected 50.5 reading. It featured stronger underlying components in new orders, production as well as employment.

(+) Personal income was stronger than expected for December, at +2.6% versus a consensus expectation of +0.8%; however, it appears much of this one month figure was the result of 2012 dividend payments (the compensation portion rose +0.6%, in line with consensus). PCE prices were flat for the month (ending the year with a tempered +1.4% annual inflation rate), while consumer spending rose +0.2%, a tenth of a point below consensus.

(+) Construction spending gained +0.9% month-over-month, which positively surprised, relative to the +0.7% expected. Residential construction rose +2.2%, non-residential gained a close +1.8%, while a decline in public spending of -1.4% brought down the overall number.

(+) While this looks to be old news now, the Case-Shiller Home Price Index rose in November by +0.63%—falling just falling short of the expected +0.70% result. Home prices rose in 18 of the 20 cities in the index, led by San Francisco, Minneapolis and Atlanta. Year-over-year, which is a more appropriate timeframe this for this series, the index gained +5.5%, which reflects continued recovery.

(-) Pending home sales for December, however, fell -4.3%, versus an expected flat result. The weakness was nationwide (in 3 of the 4 U.S. regions—everywhere but the Midwest, which gained about a percent). This series, like many others in the housing realm, tends to be volatile month-to-month and the underlying pattern has been upward in recent months.

(-) The Conference Board’s Consumer Confidence survey fell again in January, with a drop to 58.6—below an expected 64.0 reading. Consumer opinions of present conditions and future expectations both declined, and the ‘labor differential’ piece (which rates job market conditions based on how difficult jobs are to find) fell. Anecdotally, comments from the Conference Board mentioned that the expiration of the temporary decrease in the payroll tax looked to be a primary reason for the negativity. While a small amount in percentage terms (2%), the spending impact is quite real for many lower-income Americans—the media has continually reminded us of this in recent months and this may have also contributed negatively to sentiment. On a similar note, a recent Morgan Stanley business conditions report was also lackluster—with a rising number of respondents expecting the environment to deteriorate if fiscal cliff issues are not resolved. However, they were optimistic about hiring and capex in the next six months. Credit conditions have also remained loose and/or have become a bit looser (one goal of the Fed’s easing plan).

(+) By contrast, the University of Michigan/Reuters consumer sentiment survey was a little better than expected, at an increase from January’s 71.3 to 73.8. Consensus called for a flat 71.5, although the conference board results earlier in the week called this into question. It seems consumers are a bit more optimistic after all, at least about the future, while their assessment of current conditions remains poor. The payroll tax hike, as mentioned above, seems to be a catalyst for this feeling—less so for higher-income households (who also have higher investment market exposure, so have benefitted from gains here recently).

(+) The ADP employment report, which precludes the government release by a few days and often differs from it by a little or a lot, showed January job gains of +192k, which surpassed the consensus expectation of +165k jobs. This month, smaller and medium-sized companies ended up being the drivers of growth, which ran counter to the trend of the past year or two, where large employers were adding a good portion of new jobs. The leading sectors for job additions were professional/business services as well was trade/transportation.

(-) Initial jobless claims for the Jan. 26 ending week rose from 330k to 368k, higher than the 350k expected by consensus. Continuing claims for the Jan. 19 week came in at 3,197k, which was a bit higher than the 3,171k expected. The recent volatility in these figures is not unusual for this time of the year; the continuing claims numbers continue to trend lower—a positive.

(0) The larger jobs story, the government’s employment situation report, turned out roughly as expected. Nonfarm payrolls came in at +157k, which was a few thousand below the expected +165k (of course, we know that a large amount of monthly ‘error’ is built into this number). On the positive side, prior months’ growth was revised upward (by +125k) and general job trends are well disbursed between different industries—transport/trade, construction and services. Despite expectations of no change, the unemployment rate rose by a tenth of one percent to 7.9%. That said, the number is a bit weak when accounting for some population control adjustments the government makes behind the scenes. Additionally, the labor force participation rate remained quite low at 63.6%. Again, despite how much emphasis is placed on these figures, they are based on models and estimates, so contain a fair amount of potential error and later revisions. Hourly earnings were a bit higher, and the workweek slightly shorter, but not by meaningful amounts.

(0) The employment cost index, a more obscure measure, rose 0.5% for the fourth quarter—largely as expected. This brought employment costs to +1.9% and wages/salaries to +1.7% for the full year. We watch these types of a reports a bit more closely due to the close connection between wage growth and overall inflation—so far, this has remained under control.

Market Notes

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.




















Earnings for S&P firms continued to roll in and results were mixed, yet generally higher. Telecom, energy and technology led last week, while consumer discretionary and materials lagged. The bulk of firms have beaten estimates, but growth remains low.

We just spoke about the S&P’s 1500 level last week, and now the Dow has reached 14,000—another newsmaker. While this means little from a fundamental standpoint, it does raise the public’s awareness of the success of the stock market since the recovery and may spur interest. We look at this as a potential ‘phase two’ of sorts, where investor focus looks at past performance and makes decisions accordingly—this factor, as well as the fundamentals which show equities as reasonably attractive relative to bonds—may help sustain upward movement.

Developed foreign stocks performed well on the week, a bit better than U.S. stocks, while performance was generally country-specific. Core Europe outperformed the periphery and developed Asia tended to outperform emerging Asia. This was perhaps less of a statement on emerging markets than it was a sign of improved confidence in developed nations, which have been beaten up off-and-on for the past several years but have begun to recover.

Bonds had a rough week, with yields on the 10-year Treasury reaching 2% again. High yield and other credit also struggled, while foreign debt performed well in several areas.

In commodities, industrial metals such as nickel and zinc benefitted from positive weeks, while unleaded gas also rose by 5% on the week. With more optimism than pessimism in global markets, precious metals were the weakest commodity group. The rise in gasoline prices was correlated to the temporary closure of a few refineries for spring repairs (prior to the peak summer) and permanent closure of several others, coupled with lower inventories lately.

Have a great week.