U.S. economic data through January were generally favorable. Momentum from the 2.8 percent real GDP growth rate of 2011Q4 appears to be carrying through to early 2012. The U.S. economy is generating jobs and the unemployment rate is on a declining trend. The Federal Reserve took the historic step of announcing its desire to keep the federal funds rate at very low levels through the end of 2014. The Congressional Budget Office recently released budget projections showing progress on pulling the federal budget down, as a percentage of GDP, to 7.0 percent for fiscal year 2012, down from 10.4 percent in 2009. European leaders have made some initial progress in establishing a framework for the long-term sustainability of the euro-zone. Negotiations over Greek debt payments look like they have a reasonable chance of averting a chaotic default. China’s GDP growth registered 8.2 percent in 2011Q4 and their efforts at engineering a “soft landing” for their overheated economy appear to be working. Muddling through the aftermath of the Great Recession is happening in all corners of the globe.
The January meeting of the Federal Open Market Committee of the Federal Reserve resulted in three significant initiatives. One was to extend the “extended period” through the end of 2014. Another was to announce an inflation target of two percent as measured by the personal consumption expenditure price index. The third was to provide more detail about committee members’ projections for the fed funds rate. The Fed is remaking itself from an institution shrouded in inertia and mystery, to a more open and more active policy management center.
The advance estimate of 2011Q4 real GDP growth came in a little weaker than expected at a 2.8 percent annualized rate, continuing the string of quarterly improvement through 2011. Consumers again could not push the economy forward, increasing their spending by only 2.0 percent for the fourth quarter. Total fixed investment was soft, increasing at a 3.3 percent annual rate, held down by business investment in structures, which declined at a 7.2 percent annual rate. Inventories were strong, increasing by $58.0 billion ($2005), which added 1.9 percentage points to real GDP growth. The big drag to 2011Q4 GDP came from government spending which declined at a 4.6 percent annual rate, weighed down by a large 12.5 percent decline in federal defense spending.
Payroll employment increased by 243,000 in January, well above consensus expectations. The unemployment rate dipped to 8.3 percent. Manufacturing added a hefty 50,000 jobs for the month while construction gained 21,000. Job growth may turn out to be the upside surprise of 2012 if recent trends continue.
Click here for the February 2012 U.S. Economic Update, including commentary on the U.S. budget deficit and an expanded forecast worksheet: USEconomicUpdate0212.