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Economic Week in Review: Fed's question is to buy or not to buy?

April 19, 2013

Amid reports of reduced consumer prices and a spotty job market, the Federal Reserve's upcoming policy meeting likely will grapple with the question: How long should the Fed stick with its easy monetary policy, including the ongoing purchase of billions of dollars worth of bonds and mortgage-backed securities? While some Fed officials recently have suggested scaling back the program, this week's reports may give the central bank some leeway to continue stimulating the sluggish U.S. economy by keeping interest rates low. The Fed's policymaking body, the Federal Open Market Committee, will begin its two-day meeting on April 30.

For the week ended April 19, 2013, the S&P 500 Index fell 2.1% to 1,555 (for a year-to-date total return—including price change plus dividends—of about 9.7%). The yield on the 10-year U.S. Treasury note fell 2 basis points to 1.73% (for a year-to-date decrease of 5 basis points).

Consumer prices down

The cost of consumer goods dipped 0.2% in March, as a 4.4% drop in gasoline prices offset a slight gain in service costs. The decline of the Consumer Price Index followed February's 0.7% increase. Core CPI, excluding food and energy, ticked up 0.1%. Analysts said the 1.9% increase in core prices from March 2012 indicates the Federal Reserve's policy isn't causing any inflationary pressures that might force monetary tightening—at least not so far. The Fed's annual target rate of inflation is 2%, but has set 2.5% as an acceptable threshold to continue its current course to keep the economy out of recession and comfortably above deflationary conditions.

Analysts said the low inflation rate could enable the Federal Reserve to continue its $85 billion monthly bond-buying program. In addition to their inflation target, the Fed has linked the program to conditions in the labor market, which hasn't produced the substantial improvement officials say they're looking to see.

Consumer Price Index

Housing starts go up the ladder

Construction of multifamily homes drove housing starts up 7% in March to its highest level since June, 2008. The seasonally adjusted annual rate was just under 1.04 million, as construction of homes with at least five units rose 31%. February's figures were revised sharply upward to 968,000.

There were a few warning signs for the industry. Construction of single-family homes dropped 4.8% and the number of new building permits fell almost 4%, which could indicate slower construction in the coming months. Yet analysts are hoping the improvement in the housing market will support the economy, as home-related spending—including construction and renovations—has added to economic growth for seven straight quarters.

Industrial production rises

Industrial output rose a seasonally adjusted 0.4% in March as utility output surged 5.3% due to unseasonably cold weather—the largest monthly increase since early 2007. Overall production for the first quarter was up at a 5% annualized rate, the best gain since the same quarter a year ago. Capacity utilization was up to a recovery high of 78.5% as previously unused assets have been put back to work.

Fed reports modest growth

A Federal Reserve report said new-home construction and auto manufacturing enabled the U.S. economy to grow at a moderate pace through early April. The Federal Reserve Board's "Beige Book," a collection of insights from U.S. businesses and economists from across the Fed's 12 districts, produced some contradictory positions: upbeat about the home, auto, and information technology sectors, while concerned about the soft job market, restrained consumer spending, and uneven manufacturing output.

Leading indicators slip

The index of leading indicators released by the Conference Board dipped 0.1% percent in March, down from an average 0.5% increase over the prior three months. Weak consumer confidence and a drop in manufacturing and building permits contributed to the decline. Analysts said the 1.7% year-by-year improvement is less than the 2% figure posted for 2012, showing an economy still struggling to find its legs.

"Consumer confidence will be tested as the full impact of the sequester and payroll tax increases become clearer," said Vanguard economist Andrew J. Patterson. "Weak consumer expectations would serve as a headwind for economic growth in the near term."

The economic week ahead

Next week brings reports on existing-home sales Monday, new-home sales Tuesday, and durable goods Wednesday. Figures on the Gross Domestic Product will be released Friday.

Summary of major economic reports
Date Report Actual
expected value
10-year note yield S&P 500 Index
April 15       –3 bp –2.3%
April 16 Consumer Price Index (March)
Source: Labor Department
–0.2%  0.0% +3 bp +1.4%
  CPI, except food and energy (March)
Source: Labor Department
+0.1%  +0.2%    
  New Residential Construction (March, annualized)
Source: Commerce Department
1,036,000  930,000    
  Industrial Production (March)
Source: Federal Reserve Board
+0.4% +0.2%    
April 17 Beige Book
Source: Federal Reserve Board
–2 bp –1.4%
April 18 Initial Jobless Claims (week ended April 13)
Source: Labor Department
352,000 350,000 –1 bp –0.7%
  Leading Economic Indicators (March)
Source: The Conference Board
–0.1% +0.1%
April 19       +1 bp +0.9%
      Weekly change –2 bp –2.1%

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.
  • All investing is subject to risk, including possible loss of principal.
  • 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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