What's Going Right?
By Chris Maxey, Ryan Davis
December 18, 2012
***The Fortigent Weekly Economic Report will be taking a holiday break until January 7. Happy Holidays and Happy New Year!***
Stocks Fall Despite Fed Action
Equity markets declined last week, despite new accommodative measures announced by the Federal Reserve. In fact, equity markets were up nearly 1.5% for the week heading into the Federal Open Market Committee’s (FOMC) mid-day press release Wednesday, suggesting investors were not satisfied with the new measures. The S&P 500 finished down 0.3% and the Dow Jones Industrial Average declined 0.2%.
The FOMC announced that it would replace Operation Twist with an outright purchasing program. While the former funded the purchase of $45 billion per month in longer dated Treasuries with the sale of shorter dated ones, the new program will simply purchase $45 billion without so-called sterilization. This will increase the Fed’s balance sheet, and is in addition to the $40 billion in mortgages the bank is also purchasing.
The FOMC surprised many by also announcing that it was tying interest rate policy to the unemployment rate. The committee will maintain its zero interest rate policy until the unemployment rate falls below 6.5%, so long as core inflation remains below 2.5%. This raises the possibility that the Fed could end its low rate stance earlier than its previously announced 2015 target date.
Inflation should not be a hindrance at this juncture, however, with both producer and consumer prices coming in soft in November. Producer prices fell 0.8% during the month, while consumer prices declined 0.3%. Both indices contracted as a result of weaker energy prices. Gasoline and natural gas prices have been coming down in recent months on bloated supply levels and warmer-than-normal temperatures.
Core inflation was also muted, coming in at 0.1% for both reports. On a year-over-year basis, price increases have been slowing; producer prices rose 1.4% and consumer prices gained 1.8% over the past 12 months.
Economic data was mixed last week, as some of the lingering effects of Hurricane Sandy affected a few reports.
On Tuesday, the National Federation of Independent Businesses (NFIB) reported that small businesses weakened sharply in November. The NFIB’s Small Business Optimism index declined 5.6 points to 87.5, one of the weakest readings in the series’ history and well below levels the group considers recessionary.
Weakness was broad-based, as nine of the index’s 10 components declined in the month. Interestingly, NFIB was able to strip out responses from areas affected by Hurricane Sandy, and found no major impact on the headline index level. Instead, the group attributed the drop in business optimism to the November election, and the heightened uncertainty over policy in the coming months. This was reflected in the measure of business owners expecting better business conditions in six months, which fell an astonishing 37 points to a net negative 35 percent.
Retail sales rose 0.3% in November, bouncing back from a 0.3% decline in October. November’s figure was below an expected 0.6% gain, but somewhat mitigated by a 4.0% decline in gasoline sales. This fall was primarily attributable to declines in prices.
“Core” retail sales, which strip out the impact of automobiles and gasoline, were more favorable. The measure increased 0.7% during the month, above expectations, and signaling that consumer trends are recovering following a storm-impacted October.
The health of the consumer has been scrutinized recently in the wake of plummeting consumer sentiment and weak personal consumption expenditures. November’s retail data refute this trend somewhat, but the fact remains that income growth continues to be tepid and consumers are dipping into their savings to finance purchases.
Initial jobless claims appear to be on the mend following severe distortions in the wake of October’s hurricane. Claims fell to 343,000 from 372,000, well below the 400,000-plus levels seen last month. This caused the 4-week moving average, more closely followed given the volatility in the weekly series, to fall below 400,000. This would seem to indicate the government jobs report should be in good shape in December, although there did not appear to be any negative effect in November’s report.
What’s Going Right?
Discussions of the fiscal cliff are capturing investor’s attention, largely at the expense of trends pointing in the right direction. Year-end is synonymous with future prognostications, but current indicators suggest there is reason to be optimistic about the turn of the calendar this holiday season.
With all the focus on the fiscal cliff, Europe’s debt crisis, and the economic slowdown, it is sometimes easy to overlook the fact the American consumers are the primary cog in our economic engine. Consumers have been surprisingly resilient recently with retail sales up more than 3% in the past 12 months, despite weak wage growth. Much of that spending has come from savings, indicating that consumers feel confident enough to pull from those accounts to spend.
This holiday season, consumers are speaking with their wallets. Any number of surveys shows a slight pickup in spending during the months of November and December. Analysts are currently expecting same store sales to be 4.3% higher this December relative to 2011.
Source: Thomson Reuters
Additionally, housing is showing serious signs of moving from a drag on the economy to a positive contributor. Prior to the housing peak, residential construction accounted for 5% to 6% of GDP. At the depth of the financial crisis, however, housing became an afterthought and dropped to nearly 2% of GDP. In the past several quarters, that trend has reversed and residential construction is slowly returning to a more prominent role. After years of detracting from GDP, residential construction has added an average of 0.3% to GDP growth in the past year, according to the Center for Economic and Policy Research. Housing may not become a dominant tailwind for the economy, but its role as a headwind is transitioning to the rearview mirror.
Source: Center for Economic and Policy Research
At the start of 2012, Europe looked to be on the precipice of disaster. Since that time, though, the European Central Bank announced aggressive policy actions to stem the tide of crisis. As a result, sovereign bond yields throughout Europe have been on the decline.
Source: Global Macro Monitor
Even though the economic situation is stable, particularly in the US, there is always the possibility of flare-ups. Europe is hiding in the background, the fiscal cliff will be followed by another attempt at tackling the debt ceiling, and China’s economic stabilization is encouraging, but fragile. In the meantime, the fiscal cliff is simply obfuscating an economy that is growing modestly and has the potential to accelerate throughout 2013.
the week ahead
A busy week of economic data awaits investors ahead of the holidays. Housing starts are released on Wednesday, as well as existing home sales and the FHFA Home Price index on Thursday. On the manufacturing front, the Empire State Manufacturing Survey, Philadelphia Fed Survey, and durable goods orders are on tap. Important data regarding the consumer is also scheduled, with the personal income and outlays and consumer sentiment reports released on Friday.
The final estimate of third quarter GDP is also due out on Thursday. Economists are looking for a slight uptick from the previous estimate of 2.7%.
Several central banks meet this week, including India, Sweden, Hungary, Turkey, Taiwan, Czech Republic, Norway, Japan, and Colombia. Sweden, Turkey, and Hungary are expected to cut interest rates, while Japan will likely increase the size of its quantitative easing program.
Fortigent, LLC delivers a fully integrated and customizable business-to-business outsourced wealth management solution to banks, trust companies, and independent advisory firms. Services include a comprehensive investment platform with particular expertise in alternative investments, a flexible unified managed account program, and consolidated wealth reporting. Fortigent's web-based portal interface allows access to proposal and rebalancing tools, client portfolio reporting and accounting, as well as industry articles, research papers, and other practice management and business development resources.
For more information, please visit our website at http://www.Fortigent.com.
The information provided is general in nature and is not intended to be, and should not be construed as, investment, legal or tax advice. Fortigent makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information. The information is subject to change and, although based upon information that Fortigent considers reliable, is not guaranteed as to accuracy or completeness.
Not FDIC Insured No Bank Guarantee May Lose Value