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Economic Week in Review: New Fed chair makes her mark

March 21, 2014

The Federal Reserve Board's first meeting with Janet Yellen as chairwoman was an eventful one: The central bank refined its guidance regarding short-term interest rates and also continued to reduce its monthly bond-buying purchases. Overall for the week, economic news was mixed, with a positive slant as the difficult winter shouldered most of the blame for weakness over the previous two months.

For the week ended March 21, 2014, the S&P 500 Index was up 1.4% to 1,867 (for a year-to-date total return—including price change plus dividends—of about 1.5%). The yield on the 10-year U.S. Treasury note rose 10 basis points for the week to 2.75% for a year-to-date decrease of 29 basis points).

Fed tweaks language

The Fed has held short-term interest rates between 0% and 0.25% since the financial crisis in 2008. Instead of pegging changes in the policy rate to unemployment, the Fed said it would consider a "wide range" of factors in deciding when to raise interest rates.

Previously, the Fed had said it wouldn't consider raising interest rates until the unemployment rate dropped to 6.5%, as long as inflation remained below 2.5%. In its new statement, the Fed reinforced the idea that it will "take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments" while moving away from the 6.5% threshold.

"In their statement and Janet Yellen's subsequent press conference, policymakers positioned themselves to take a more nuanced approach to forward guidance wherein they focused less on any one particular variable and reinforced their holistic analysis of economic conditions," said Vanguard economic analyst Andrew Patterson.

Also, the Fed announced it would trim its monthly bond-buying purchases to about $55 billion, beginning in April. It was the third straight meeting the Fed has reduced its monthly bond purchases by $10 billion, evidence it believes the economy is strong enough to handle the withdrawal of its stimulus.

However, at the same time, the Fed also acknowledged some recent signs of weakness: "Economic activity slowed during the winter months, in part reflecting adverse weather conditions." The Fed noted that the labor market has shown improvement, household spending and business fixed investment continued to advance, and the housing sector recovery remained slow.

Industrial production increases

Industrial production, which captures the output of factories, mines, and utilities, advanced 0.6% in February. The gain was a rebound from January's revised 0.2% decline and above economists' expectations. A 0.8% rise in factory output drove the increase and was a welcome bounce back from January's 0.9% drop, which was mostly related to the harsh weather.

Automobile production, which climbed 4.8%, was behind the upturn in manufacturing. The rise in factory production was its highest since last August. Production at mines was up 0.3% and utilities output dropped 0.2%.

February's total production is 2.8% above its year-ago level. Capacity utilization, which is measured across industries, increased 0.3% to 78.8%, which is modestly below its long-run average from 1972–2013, according to the Federal Reserve Board.

Food prices behind CPI bump

The Consumer Price Index, a monthly indicator of inflation, rose 0.1% in February, identical to January's figure and in line with economists' forecasts. Food prices swelled 0.4% and were responsible for more than half of the index's advance.

Inflation remains tame overall. Energy prices fell 0.5% as a drop in gasoline prices countered surges in fuel oil and natural gas prices. The frigid winter triggered the rise in oil and natural gas prices and the subsequent increase in consumers' utility bills.

Core CPI, which excludes volatile food and energy prices and provides a more accurate measure of inflation, rose 0.1% for the third straight month. Compared with a year ago, consumer inflation was up 1.1% and core inflation up 1.6%.

Mixed results for housing starts

New-home construction dipped 0.2% in February, slightly more than economists forecast. However, the slip was far smaller than declines in January and December, when severe winter weather caused delays. Also, January's housing starts were revised upward to an 11.2% retreat from 16.0%.

Single-family starts increased 0.3%, while multifamily starts slid 1.2%, sharp improvements from January and December but well below November's pace. Much of the rebound came from the Midwest.

Starts were modestly higher in the South, somewhat lower in the West, and down sharply in the still stormy Northeast. It's encouraging that permits rose 7.7% in February and completions 4.4%. Compared with year-ago levels, housing starts are down 6.4%, while permits are up 6.9% and completions up 21.9%.

Existing-home sales

Weather dents existing-home sales

Sales of previously owned homes fell 0.4% in February, a shade below economists' forecasts. The winter weather and rising prices led to the drop, and the monthly pace of sales is at its lowest since July 2012. Compared with a year ago, existing-home sales are down 7.1%.

Sales declined the most in the hard-hit Northeast, less in the Midwest, and were up in the West and South. The median existing-home price was $189,000, 9.1% higher than a year ago. Inventory climbed 6.4% in February, and the months of supply rose to 5.2 months, at the current sales pace, from 4.9 months.

Leading indicators rise

The Conference Board's index of leading indicators, a measure of the U.S. economic outlook for the next three to six months, advanced 0.5% in February. Slightly above economists' estimates, the index improved over January's 0.1% reading. The coincident index, which measures current economic activity, rose 0.2% in February, and the lagging index climbed 0.3%.

Of the index's ten components, five were higher, and the five decliners were fairly subdued. Financial components, including interest-rate spreads and the credit index, made the largest contribution to the gains, and housing permits also rose significantly. Among the falling components were average workweek, manufacturing orders, and consumer expectations.

The economic week ahead

Scheduled reports include consumer confidence and new-home sales (Tuesday), durable-goods orders (Wednesday), updated figures for first-quarter gross domestic product (Thursday), and personal income (Friday).

Summary of major economic reports
Date Report Actual
value
Consensus
expected value
10-year note yield S&P 500 Index
March 17 Industrial Production (February)
Source: Federal Reserve Board
+0.6% +0.3% +5 bp +1.0%
March 18 Consumer Price Index (February)
Source: Labor Department
+0.1% +0.2% –2 bp +0.7%
  CPI, except food and energy (February)
Source: Labor Department
+0.1% +0.1%    
  New Residential Construction (February, annualized)
Source: Commerce Department
907,000 910,000    
March 19 FOMC Monetary Policy (February)
Source: Federal Reserve Board
+10 bp –0.6%
March 20 Initial Jobless Claims (week ended March 15)
Source: Labor Department
320,000 320,000 +1 bp +0.6%
  Existing-Home Sales (February, annualized)
Source: National Association of Realtors
4.60 million 4.61 million  
  Leading Economic Indicators (February)
Source: The Conference Board
+0.5% +0.4%    
March 21       –4 bp –0.3%
      Weekly change +10 bp +1.4%

bp=basis points. 100 basis points equal 1%. For example, if a bond's yield rises from 5.0% 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 our Guide to major U.S. economic reports.
  • All investing is subject to risk, including the possible loss of the money you invest.
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