Last Week in Review

Economic Week in Review: The Fed details its slow-growth projections

January 27, 2012

Amid some encouraging signs that the economy continues to grow modestly, Federal Reserve officials gave an unprecedented look at the details of their economic expectations. In a report issued Wednesday, the Fed signaled that it expects growth to remain modest enough to allow short-term interest rates to remain near rock bottom for even longer than it had projected in recent months. For the week ended January 27, the S&P 500 Index rose 0.1% to 1,316 (for a year-to-date total return—including price change plus dividends—of about +4.8%). The yield on the 10-year U.S. Treasury note fell 12 basis points to 1.93% (for a year-to-date increase of 4 basis points).

Fed extends its ultra-low rate pledge

The Federal Reserve's policymaking committee announced that it now expects to keep its key short-term interest rate near zero until late 2014, an extension of its earlier projection. Last year, it said it intended to keep the federal funds target rate between 0% and 0.25% until at least mid-2013.

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In its first meeting since announcing it would issue more detailed explanations of its projections, the committee and Federal Reserve Bank presidents also disclosed their individual expectations for the rate down the road. The officials' projections were evenly spread among those who think the rate might have to be increased sooner, those who expect the rate to be raised by late 2014, and those who expect the rate to stay at its current level even longer than 2014.

The committee also said it expects the unemployment rate to fall to between 8.2% and 8.5% this year, a slight improvement over its prediction in November. But the Fed also predicted the economy will grow between 2.2% and 2.7% this year, slightly slower than it had previously thought. The committee also projected inflation would remain below its now-official long-term target of 2%, hovering between 1.5% and 1.8% this year.

Leading indicators tick upward

The Conference Board's measure of potential future economic activity rose 0.4% in December, a bit lower than expected but higher than November's 0.2% increase. Eight of the gauge's ten components were positive, with the strongest readings coming from a rising spread in interest rates and improving jobless claims.

The indicators "provide some reason for cautious optimism in the first half of 2012," said Ken Goldstein, economist at The Conference Board. "This somewhat positive outlook for a strengthening domestic economy would seem to be at odds with a global economy that is losing some steam. Looking ahead, the big question remains whether cooling conditions elsewhere will limit domestic growth or, conversely, growth in the U.S. will lend some economic support to the rest of the globe."

GDP turns upward in 4th quarter

The first estimate of the nation's gross domestic product (GDP) for the fourth quarter showed the U.S. economy grew at an annualized rate of 2.8%, which was a bit lower than expected but the strongest showing since the second quarter of 2010. The improvement in the most recent quarter came almost entirely from increased inventory investment, which is unlikely to be sustainable in the early part of 2012. Consumer spending improved slightly, fixed investment slowed considerably, international trade went from a net positive to a slight drag, and government spending became a bigger brake on growth.

For the year, the U.S. economy grew 1.7%, down from a 3% rise in 2010. A spike in commodity prices during the first part of 2011, the earthquake disaster in Japan, sovereign debt worries in the Eurozone, and political bickering in Washington, D.C., combined to slow the U.S. economy. Investment and exports were the strong points in the data for the year.

"This latest GDP report reflects what we expect for 2012: government spending becoming more of a drag as fiscal consolidation kicks in, consumer spending contributing less than its normal two-thirds share of the economy as households continue to work down their debt loads, and businesses holding back on spending plans until the future looks more certain," said Roger Aliaga-Díaz, senior economist at Vanguard. "As a result, we're expecting a sustained period of positive but below-average growth."

GDP: Under the hood
	4Q	2011
Real GDP	+2.8%	+1.7%
Contributions of major components (percentage points)
Consumer spending	+1.45	+1.53
Business spending	+2.35	+0.58
Trade (exports minus imports)	–0.11	+0.05
Federal, state, and local government spending	–0.93	–0.45

Quarterly figures annualized.

Get a closer look at GDP and its components.

New-home sales post record low for year

Sales of new single-family homes fell 2.2% in December compared with November. Sales were lower than expected, registering an annual rate of 307,000. For the year, total new home sales dropped 7.3%, hitting an all-time low going back to 1963, the first year this data was compiled. On the bright side, fourth-quarter sales rose an annualized 20% from the previous quarter, and were 3% higher when compared with the fourth quarter of 2010. When seasonally adjusted, the median new-home price of $201,100 was 7% lower than November's and 13% lower than that of one year ago. The supply of available new homes remained near the six-month mark, which is considered a good balance of supply and demand.

Durable goods orders continue to grow

New orders for durable manufactured goods rose a better-than-expected 3% in December. The increase, the fifth in the last six months, followed a 4.3% rise in November. Transportation equipment, up for two consecutive months, posted the largest increase at 5.5%, notably because of orders for nondefense aircraft and parts. Excluding transportation, new orders increased 2.1%. Excluding defense, new orders increased 3.5%.

The economic week ahead

Next week, personal income will be reported on Monday, the employment cost index and consumer confidence reports come out on Tuesday, construction spending and manufacturing will be updated on Wednesday, and a reading on productivity and costs will be released on Thursday. Friday will bring the highly anticipated monthly employment update, along with factory orders data and the ISM's nonmanufacturing index.

Summary of major economic reports
Date	Report	Actual value	Consensus expected value	10-year note yield	S&P 500 Index
January 23				+4 bp	0%
January 24				–1 bp	–0.1%
January 25	FOMC meeting ends with no change in current monetary policy. Source: Federal Reserve Board	—	—	–7 bp	+0.9%
January 26	Initial Jobless Claims (week ended January 21) Source: Labor Department	377,000	370,000	–5 bp	–0.6%
	Durable Goods Orders (December) Source: Commerce Department	+3.0%	+2.0%
	New-Home Sales (December, annualized) Source: Commerce Department	307,000	321,000
	Leading Economic Indicators (December) Source: The Conference Board	+0.4%	+0.7%
January 27	Real Gross Domestic Product (4Q annual rate) Source: Commerce Department	+2.8%	+3.0%	–3 bp	–0.2%
			Weekly change	–12 bp	+0.1%

bp=basis points. 100 basis points equal 1%. For example, if a bond's yield rises from 5% to 5.5%, the increase is 50 basis points.

Notes

• The economic statistics presented in this report are subject to revision by the agencies that issue them. For more information on the reports mentioned in this article, read Guide to major U.S. economic reports.
• All investments are subject to risk.
• Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

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