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Economic Week in Review: Consumers are optimistic

March 28, 2014

Consumer confidence hit a multiyear high in March, as the latest estimate of U.S. economic growth proved stronger than expected. However, new-home sales dipped mostly because of the harsh winter weather. For the week ended March 28, 2014, the S&P 500 Index slid 0.5% to 1,857 (for a year-to-date total return—including price change plus dividends—of about 1%). The yield on the 10-year U.S. Treasury note fell 2 basis points to 2.73% (for a year-to-date decrease of 31 basis points).

Fourth-quarter growth revised upward

The U.S. economy grew at an annual rate of 2.6% in the fourth quarter of 2013. Real gross domestic product (GDP), the value of all goods and services produced in the United States adjusted for inflation, was revised upward from 2.4%.

Although fourth-quarter GDP rose slower than the third quarter's 4.1% rate, the underlying strength in the economy remained solid. Final sales of domestic product (GDP minus inventories) was stronger in the second half of the year, modestly increasing 2.7% in the fourth quarter from 2.5% in the previous quarter—the fastest growth since the first quarter of 2012. Corporate profits rose 2.2% in the quarter from 1.9% in the third quarter.

Fueling fourth-quarter growth was robust consumer spending—the highest level in three years. Consumer spending was concentrated in services. Other positive contributors to fourth-quarter GDP included net exports and business investment. Federal government spending and residential construction detracted from the expansion.

"We saw a deceleration in growth last quarter, driven by volatility in inventory accumulation, cuts in federal spending, along with a pullback in residential real estate spending," said Vanguard economic analyst Vytas Maciulis. "Still, the underlying growth rate of the economy seems to be solid. While the unseasonably cold winter will likely influence the data coming through for the beginning of this year, we expect the trends of increased business investment and a reduced focus on household balance sheet repair to continue to drive growth going forward."

GDP: Under the hood
3Q final
estimate
4Q third
estimate
Real GDP growth estimates (annualized)
+4.1% +2.6%
Components: Contributions/subtractions (percentage points)
Consumer spending +1.4 +2.2
Housing-sector investment* +0.3 –0.3
Business spending and inventories +2.2 +0.7
Trade (exports minus imports) +0.1 +1.0
Federal, state, and local government spending +0.1 –1.0

*Together with business spending and inventories, the combined amount equals the "investment" category of GDP.

Get a closer look at GDP and its components.

Consumer confidence climbs to six-year high

The Conference Board Consumer Confidence Index climbed 4 points to 82.3 in March—its highest level in six years. U.S. consumers are more optimistic about business conditions and their employment prospects in the next six months. However, they were less enthusiastic about their present condition and don't expect to see major changes in the job market or their incomes in the immediate term.

"While consumers were moderately more upbeat about future job prospects and the overall economy, they were less optimistic about income growth," said Lynn Franco, director of economic indicators at The Conference Board, in a statement. "Overall, consumers expect the economy to continue improving and believe it may even pick up a little steam in the months ahead."

New-home sales slip, but rebound continues

Sales of new single-family homes fell 3.3% in February to an annual rate of 440,000 units. Compared with a year earlier, sales were 1.1% lower. Rising mortgage rates and the harsh winter weather contributed to the weakness, which affected three of the four regions. The Northeast was hit hardest, with a drop of 32.4%. Year over year, the median sales price for new homes slid 1.2% to $261,800. There was a 5.2-month supply of homes on the market last month compared with a 5.0-month supply in January. Analysts are nevertheless optimistic because new-home sales have been rebounding over the past year with the exception of a few rough patches. Generally, supply continues to be low and demand remains strong.

Durable-goods orders rise, business spending plans retreat

New orders for durable manufactured goods—products meant to last three or more years, ranging from refrigerators to airplanes—jumped 2.2% in February after declining for two consecutive months. The volatile transportation segment accounted for much of the gain, with sizable increases in aircraft and automobile orders. (Transportation orders increased 6.9% in February, after slipping 6.2% a month earlier.) Excluding transportation, orders rose 0.2%. Shipments inched up 0.9% and inventories grew 0.8%.

Nondefense orders excluding transportation—often used as a proxy for business spending plans—fell 1.3% last month. Analysts said this decline may signal some softness in business investment in the coming quarter.

Personal income and spending rise

U.S. consumers spent more money shopping in February as their incomes rose. Personal consumption, which accounts for about two-thirds of the U.S. economy, grew 0.3% in February, compared with 0.2% in January. Personal income climbed 0.3% in February, same as January. There was a slight improvement in the savings rate, which was up 4.3% in February, from 4.2% a month earlier. Inflation remained subdued.

The economic week ahead

Several economic reports are expected next week: construction spending and the Institute for Supply Management (ISM) Manufacturing Index (Tuesday), factory orders (Wednesday), international trade and ISM Non-Manufacturing Index (Thursday), and the employment situation (Friday).

Summary of major economic reports
Date Report Actual
value
Consensus
expected value
10-year note yield S&P 500 Index
March 24       –1 bp –0.5%
March 25 Consumer Confidence (March)
Source: The Conference Board
82.3 78.6 +1 bp +0.4%
  New-Home Sales (February, annualized)
Source: Commerce Department
440,000 445,000    
March 26 Durable-Goods Orders (February)
Source: Commerce Department
+2.2% +1.0% –4 bp –0.7%
March 27 Initial Jobless Claims (week ended March 22)
Source: Labor Department
311,000 325,000 –2 bp –0.2%
  Real Gross Domestic Product (4Q, annual rate)
Source: Commerce Department
2.63% 2.60%    
March 28 Personal Income (February)
Source: Commerce Department
+0.3% +0.2% +4 bp +0.5%
  Personal Spending (February)
Source: Commerce Department
+0.3% +0.3%    
      Weekly change –2 bp  –0.5%

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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