It was a light week for economic data with nothing to dispel the fog that has settled over the current quarter as we wait to see how consumers react to fiscal tightening. Strong income growth in December due to tax-avoidance measures may pad consumer spending early in the quarter. We do know that January auto sales were down slightly. Chain store sales though mid–January held up on year-ago comparisons. Gasoline prices increased through the month. Consumer confidence dropped and consumer sentiment improved. Anecdotal reports say that low-income households are struggling with the tax hikes. Improving home prices add a significant positive wealth effect for those with houses. Our February U.S . Economic Update shows a weak 0.7 percent annualized gain in real consumer spending for the current quarter. So far nothing contradicts that view. In the latest monthly data, for December, we see an unexpectedly rapid narrowing of the trade gap to -$38.5 billion. What adds significance to this number is the fact that Q4 real GDP growth was barely negative at -0.1 percent annualized, as barely as it can get and still be negative. The favorable December trade data will likely push Q4 real GDP growth into the slightly positive camp when the second estimate of 2012Q4 GDP is released on February 28. The price-adjusted balance of trade in goods now supports a near-neutral trade impact on Q4 GDP, which is an improvement from the small drag that was incorporated as part of the first estimate of Q4 GDP. Exports to Europe and Asia are flat to down on a year-to-year basis. Petroleum imports are also flat to down on a year-to-year basis. With the soft production numbers for Q4 and moderate hiring through the quarter, fourth quarter productivity took a dive, down 2.0 percent on an annualized basis. Nonfarm business output is estimated to have grown by just 0.1 percent annualized in Q4, likely held back by Hurricane Sandy. It is not unusual to see a negative productivity report in any given quarter. We will see a bounce back in 2013Q1. Mirroring the drop in Q4 productivity, Q4 unit labor costs climbed at a 4.5 percent annual rate. This is not an ominous trend as wage gains remain well in check. Initial claims for unemployment insurance fell by 5,000 for the week ending February 2, to hit 366,000. It looks like initial claims are stabilizing in the range of 360,000 to 370,000 after dropping noticeably in mid-January. If the trend continues it would be consistent with ongoing moderate job growth through February. The ISM Non-Manufacturing Index dipped in January to a still positive 55.2 percent. Federal Reserve Governor Jeremy Stein delivered a speech Thursday on the potential risks caused by extended low interest rates. The Congressional Budget Office released their outlook for 2013 though 2023. The federal deficit is coming down now, but unless progress is made on reigning in entitlement spending, recent improvement will be undone.
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