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Economic Week in Review: Resurgence raises questions for Fed

December 06, 2013

The bulk of data released this week indicated that the economy is improving. They included a fourth month of solid job numbers, a large upward revision to the most recent GDP figure, further signs of strength in manufacturing and housing, and a pickup in exports.

The Federal Reserve will be weighing whether recent improvements, especially in the job market, are enough to warrant any tapering of its $85-billion-a-month stimulative bond-buying program. Its next meeting is scheduled for December 17–18.

For the week ended December 6, 2013, the S&P 500 Index was down a fraction at 1805 (for a year-to-date total return—including price change plus dividends—of about 29%). The yield on the 10-year U.S. Treasury note rose 13 basis points to 2.88% (for a year-to-date increase of 110 basis points).

Job market looks healthier

The closely watched monthly jobs report showed that U.S. employers added 203,000 jobs in November, beating consensus expectations of 185,000. Most of the gains were in professional and business services, which added 35,000 jobs, while manufacturing added 27,000 jobs and construction firms 17,000. The average workweek and average hourly earnings edged up as well.

A separate household survey showed a decline in the unemployment rate from 7.3% in October to 7.0% in November—its lowest level in five years.

U.S. unemployment

Inventories lift third-quarter GDP

A sharp upturn in businesses' accumulation of inventory boosted what was otherwise modest growth in the economy. The Commerce Department's second estimate of gross domestic product (GDP), the broadest measure of all goods and services produced across the economy, was 3.6% for the third quarter on an annualized, after-inflation basis, higher than both its advance estimate of 2.8% and the 2.5% recorded for the previous quarter. The increase came largely from inventory investments, but also from slower gains in imports and faster increases in state and local government spending. The value of real final sales—GDP less inventory accumulation—slowed to 1.9% in the third quarter, from 2.1% in the second quarter.

GDP: Under the hood
Advance 
estimate
Second 
estimate
3Q 2013 real GDP growth estimates (annualized)
+2.8% +3.6%
Components: Contributions/subtractions (percentage points)
Consumer spending +1.0 +1.0
Housing-sector investment* +0.4 +0.4
Business spending and inventories +1.0 +2.1
Trade (exports minus imports) +0.3 0.0
Federal, state, and local government spending +0.1 +0.1

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

Get a closer look at GDP and its components »

Exports reach a record high

The U.S. trade deficit narrowed by 5.6% in October to $40.6 billion, slightly below consensus, as exports grew faster than imports, according to the Commerce Department. Exports rose by $3.4 billion to a record $192.7 billion, boosted in part by increased exports of commodities. Imports of goods and services into the United States rose a more modest $1 billion, signaling that the U.S. economy continues to expand.

Fed survey shows economic activity steady

The latest publication of the Fed's Beige Book once again characterized the pace of economic expansion as "modest to moderate." The survey, covering early October through mid-November, revealed some weakness stemming from the government shutdown, notably in defense-related manufacturing and tourism. The auto industry, however, continued to help drive growth as a result of a large number of new-model launches and stronger demand for trucks. Support from residential construction, especially multifamily homes, remained intact as well.

New-home sales show some volatility

Housing continued to recover as new-home sales shot up 25.4% in October, to an annualized 444,000 units. That increase, however, came on the heels of a 6.6% drop in September and lower sales in July and August amid pressure from rising mortgage rates. The brisker sales pace helped push inventories down from 6.4 months' supply in September to 4.9 in October, though the median home price edged lower compared with the previous year.

Construction spending progress is patchy

A surge in spending on government projects pushed up total construction spending in October by 0.8% over the previous month—about double the consensus estimate. In contrast, a drop in government construction contributed to a 0.3% decline in total construction spending in September.

Compared with a year earlier, total construction spending was up 5.3% in October. Spending rose 2.3% on public construction but a more robust 17.8% on new single-family homes and 37.8% on new multifamily homes.

November manufacturing survey is upbeat

Despite some recent signs of weakness in manufacturing, November's Institute of Supply Management (ISM) manufacturing index climbed to 57.3—its highest level since April 2011 and higher than analysts expected. (A reading above 50 indicates that the sector is expanding.) The index, based on a survey of manufacturing supply managers, registered greater optimism among respondents on several fronts. The continuing housing recovery contributed to a rise in the index's readings for new orders, production, and employment, while a pickup in demand from abroad lifted the figure for new export orders.

Factory orders less rosy for October

New factory orders in October declined 0.9% after a 1.8% increase in September, the Commerce Department reported. Excluding transportation, new factory orders were flat. "Core" capital goods orders (for nondefense capital goods excluding aircraft) were weak as well. That suggested a cooling in business spending, though the auto industry remained strong.

Slowing growth in the service sector

A separate ISM survey of nonmanufacturing supply managers for November found a slower pace of growth in the service sector. The index, while indicating growth for the 47th consecutive month, slipped from 55.4 in October to 53.9, the lowest value since June and below the consensus estimate of 55.1. The volatility in the index can be attributed to swings in its business activity and employment components. New orders held up well and remained over 56 for the second consecutive month.

Wage growth is weak

After strong gains in August and September, wage income edged up only 0.1% in October. Personal income declined –0.1% because farm income had been inflated in September by a one-time settlement of a class-action discrimination lawsuit. Consumer spending in October nevertheless rose 0.3%. Although spending has been restrained by uncertainty, an increase in the wealth effects from rising home prices and stock market performance has helped offset the drag. Pent-up demand has also helped boost spending on long-lasting big-ticket items in particular. As spending has risen faster than income, the saving rate dipped from 5.2% to 4.8%.

The economic week ahead

Next week will be lighter for reports. Retail sales and business inventories are due out on Thursday and producer prices on Friday.

Summary of major economic reports
Date Report Actual
value
Consensus
expected value
10-year note yield S&P 500 Index
December 2 Construction Spending (October)
Source: Commerce Department
+0.8% +0.4% +6 bp –0.3%
  ISM Index (November)
Source: Institute for Supply Management
57.3 55.0    
December 3       –2 bp –0.3%
December 4 U.S. Trade Balance (October)
Source: Commerce Department
–$40.6 billion –$40.0 billion +5 bp –0.1%
  New-Home Sales (October, annualized)
Source: Commerce Department
444,000 430,000    
  ISM Non-Manufacturing Index (November)
Source: Institute for Supply Management
53.9 55.1    
  Beige Book (November)
Source: Federal Reserve Board
   
December 5 Initial Jobless Claims (week ended November 30)
Source: Labor Department
298,000 320,000 +4 bp –0.4%
  Real Gross Domestic Product (3Q, annual rate)
Source: Commerce Department
+3.6% +3.0%    
  Factory Orders (October)
Source: Commerce Department
–0.9% –1.0%    
December 6 Unemployment rate (November)
Source: Labor Department
7.0% 7.2% 0 bp +1.1%
  Nonfarm Payrolls (November)
Source: Labor Department
+203,000 +185,000    
  Personal Income (October)
Source: Commerce Department
–0.1% +0.3%    
  Personal Spending (October)
Source: Commerce Department
+0.3% +0.3%    
  Consumer Credit (October)
Source: Federal Reserve Board
+$18.2 billion +$14.5 billion    
      Weekly change +13 bp 0%

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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