Growth is improving slowly, but insufficiently to satisfy the Fed. So Fed officials are reviewing new initiatives to promote growth, including buying mortgages in the market. The Fed’s latest press release suggests that policy may remain unchanged for even longer than suggested earlier. But the Fed’s willingness to remain so staunchly committed to growth remains “data dependent”, as any significant increase in GDP growth could cause the Fed to backtrack. At the end of the day, the Fed is committed to an outcome, not to the calendar. And right now, it is committed to growth.

Fourth quarter GDP wasn’t as strong as hoped, nor as weak as it appeared. While final sales slowed to just 0.8%, a disappointingly small gain, it was the rise in imports that landed in inventory that helped depress this measure. Increased imports depress GDP, while increased inventories are excluded by focusing on final sales, which means we’re looking at only half this story. Final sales to domestic buyers, which is a cleaner measure, rose 1.7%, a better showing. And even this growth was depressed by a large decline in Federal spending on defense, as well as ongoing cutbacks by state and local governments, which took another percentage point bite out of growth. So, the data are not so weak after we cut through the noise to discern the underlying trend. Even so, a healthier economy wouldn’t require such a fine parsing of the data. Growth wasn’t as solid as hoped.

Gains in the labor market still point to better economic conditions, as does the bottoming of the housing market. Job growth is absolutely critical to any economic expansion, since jobs provide income to households, which enables them to spend. So, recent increases in payroll employment are very significant and, hopefully, the improvement will continue on Friday with release of the estimate for January. The housing market will soon enter the critical spring selling season. These two areas will reveal quite a bit about the health of the economy in 2012.

Fed policymakers have disparate views on the economy’s growth prospects, but almost all of them would prefer to see meaningfully faster growth and most would support more policy initiatives to accomplish this objective. The Fed’s statements are designed to convey this message. Therefore, investors should also understand that monetary policy will remain very supportive for the stock market, which is a significant element in our fairly bullish thesis. We are always vulnerable to shocks, of course. Nonetheless, investing is easier when the Fed is on your side.

 

 

 

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