Economic Week in Review: Fed maintains firm grip, but flexible stance
March 22, 2013
The Federal Reserve offered no big surprises when it released its economic and employment outlook as part of the Federal Open Market Committee (FOMC) meeting on Tuesday and Wednesday.
Fed Chairman Ben Bernanke acknowledged the economy's improvement but said current policies will remain in place until more progress is evident. The week's economic reports did show positive movement, but nothing that would seem to prompt Bernanke to shift course. New residential construction and existing-home sales both increased along with the leading economic indicators.
For the week ended March 22, 2013, the S&P 500 Index declined 0.2% to 1,557 (for a year-to-date total return––including price change plus dividends––of about 10%. The yield on the 10-year U.S. Treasury note fell 8 basis points to 1.93% (for a year-to-date increase of 15 basis points).
Federal Reserve maintains policies
The Federal Reserve, in the release from its latest meeting, struck a slightly more optimistic tone than in the recent past. After saying in January that economic activity had "paused," Fed officials said Wednesday that "moderate economic growth" had resumed. Although the Fed's words were a bit different, its policies remained the same.
The Fed said it would keep its target rate for short-term interest rates between 0% and 0.25% as long as the unemployment rate remained above 6.5% and inflation was no higher than 2.5%. The extremely low short-term interest rates have been in place since December 2008. Also, the Fed said it remained committed to its program of buying $40 billion worth of agency mortgage-backed securities and $45 billion worth of U.S. Treasury securities per month. The Fed's objective is to keep long-term interest rates down; that can fuel economic growth as consumers and businesses find borrowing more affordable.
The Fed slightly lowered its forecasts for economic growth and unemployment from December. It projected that the economy would grow between 2.3% and 2.8% this year and between 2.9% and 3.4% in 2014, and that the unemployment rate would fall to between 7.3% and 7.5% this year and to between 6.7% and 7.0% in 2014.
The job market remains a focus for the Fed. Although the jobless rate fell to 7.7% in February from 8.1% last August, Mr. Bernanke portrayed the progress as "partial" and "modest."
"We are seeing improvement," he said at a news conference Wednesday after the meeting. "I think one thing we would need is to make sure that this is not a temporary improvement." Mr. Bernanke also addressed the Fed's strategy to wind down the monthly bond-buying program that has been in place since September. The economy needs to be more stable before the program ends, he said, and the purchases could increase or decrease depending on the economy's health, given a "spring slump" in each of the last three years.
"We're planning to adjust our tools to respond to the changes in the outlook," Mr. Bernanke said.
Leading economic indicators increase
The Conference Board index of leading economic indicators rose 0.5% in February, above analysts' expectations. January's results were also revised higher as the index has risen three straight months and five of the past six. Eight of the ten indicators advanced, with the building permit component among the best performers. The only detractors were average consumer expectations for business conditions and manufacturers' new orders for nondefense capital goods excluding aircraft. The Conference Board's index of coincident indicators, a measure of current economic activity, rose 0.2% in February following January's 0.1% dip.
Ken Goldstein, an economist at The Conference Board, acknowledged the economy's modest growth but cautioned that the results reported this week didn't reflect sequestration, the budget cuts to federal spending that began March 1.
"The U.S. economy is growing slowly now, and with this reading increases hope that it may pick up some momentum in the second half of the year," Mr. Goldstein said. But he said the recent effects of the sequester "could dampen the pickup in GDP."
New-home construction continues to climb
The market for new homes remained strong in February. Builders broke ground on 917,000 homes for the month, 0.8% higher than the upwardly revised figure for January and slightly above analysts' forecasts.
The pace of new residential construction is running 27.7% ahead of a year ago. Single-family home construction advanced 0.5% in February and 31.5% from a year ago, and multifamily construction—for buildings with five or more units—increased 0.7% last month and 18.8% from February 2012. Gains for total housing starts in the Midwest and Northeast outweighed declines in the West and South. Building permits, an indicator of future construction, climbed 4.6% last month, and single-family housing completions rose 3.6%. January's figures for building permits and completions were revised downward.
Existing-home sales rise again
Existing-home sales grew 0.8% in February, slower than analysts' forecasts but still strong by almost every other measure. Last month's numbers were 10.2% higher than those of February 2012, and it was the 20th straight month in which sales exceeded their year-ago levels. Sales reached a level last seen during the homebuyer tax-credit period of November 2009.
Condominium and co-op sales drove the latest gains, rising 8.8%, while single-family home sales dropped 0.2%. Monthly advances in the West and South offset drops in the Northeast and Midwest. Compared with a year ago, sales were up in all four regions. The national median existing home price increased to $173,600, an 11.6% gain from February 2012 and the strongest year-over-year gain since 2005. Inventory climbed to 4.7 months' supply in February from 4.3 months in January but was down from 6.4 months' supply a year ago.
The economic week ahead
Next Thursday's report on gross domestic product will offer insight into the health of the U.S. economy. Tuesday will be especially busy, with reports on durable goods, consumer confidence, and new-home sales. The week will conclude with Friday's release on personal income.
|Summary of major economic reports|
|10-year note yield||S&P 500 Index|
|March 18||–5 bp||–0.6%|
|March 19||New Residential Construction (February, annualized)
Source: Commerce Department
|March 20||+4 bp||+0.7%|
|March 21||Initial Jobless Claims (week ended March 16)
Source: Labor Deparment
|Existing-Home Sales (February, annualized)
Source: National Association of Realtors
|4.98 million||5.0 million|
|Leading Economic Indicators (February)
Source: The Conference Board
|March 22||–2 bp||+0.7%|
|Weekly change||–8 bp||–0.2%|
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.
- 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.
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- 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.