Comerica Economic Weekly

This week’s bumper crop of data was mixed (a farmer might call it a succotash field, to stretch the analogy) as the negative sign on fourth quarter GDP and the increase in the unemployment rate in January were countered by better manufacturing conditions in January, ongoing gains to house prices through November, and strong income growth in December. Watching the mixed harvest, the Federal Reserve left its highly accommodative monetary policy unchanged. The January labor data was mildly disappointing. Payroll job growth was moderate, but on the low side of consensus, up 157,000. The unemployment rate ticked up to 7.9 percent. Revisions to historical data show modestly better job growth through 2012 than previously estimated. But that does not alter the view that 2012 was another year of muddling through with an economy that was not fully engaged. The unemployment rate ticked up to 7.9 percent, essentially unchanged over the last five months. This poor trend in the unemployment rate may be a positive for equity markets as it extends the likely duration of the Federal Reserve’s highly accommodative monetary policy. The data underlying the weak Q4 real GDP growth of -0.1 percent and the mildly disappointing January labor data remain consistent with the view that the U.S. economy limped into 2013 with some momentum in consumer spending, business investment and residential investment. Weak inventory accumulation (likely influenced by Hurricane Sandy) was a major drag on Q4 GDP as was a drop in federal defense spending. The economy remains vulnerable to the increasing headwinds of fiscal tightening. Therefore, the odds of recession for the first half of 2013 remain elevated at 40 percent. Technically, we are already halfway toward fulfilling the working definition of a recession: two consecutive quarters of declining GDP. But that could easily be revised away next month. Personal income increased by a robust 2.6 percent in December as dividend income popped ahead of the increase in dividend taxes. This will not be continued. The ISM Manufacturing Index for January came in stronger than expected, up to 53.1 percent, with most sub-categories positive and improving. Thirteen out of 18 industries reported growth for the month. Construction spending for December was also better than expected, up 0.9 percent for the month. New orders for durable goods increased by 4.6 percent in December, boosted by aircraft orders. The Case-Shiller 20-City Composite House Price Index for November was up 0.6 percent. Over the previous 12 months the index was up 5.5 percent. Nineteen out of 20 cities showed price gains for November, only New York had a decline. The Pending Home Sales Index fell 4.6 percent in December, indicating soft sales numbers are likely for January. The Conference Board’s Consumer Confidence Index declined noticeably in January to 58.6 after falling to 66.7 in December. However, the University of Michigan’s Consumer Sentiment Index improved slightly in January.

Click here for a PDF version of the Comerica Economic Weekly: CMAEconWeekly020113.

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