A full plate of economic data this week supports our cautiously optimistic outlook for 2014.
As expected, the Federal Open Market Committee voted on Wednesday to taper their program of asset purchases by another $10 billion, to a monthly total of $65 billion. Purchases of long-term Treasury bonds are now down do $35 billion per month and MBS purchases are down to $30 billion per month. This second consecutive $10 billion reduction sets expectations for Fed policy for the remainder of the year. With 7 FOMC meetings left in 2014, the Fed has established a glide path for reducing its asset purchase program to zero by the end of this year, in roughly $10 billion per meeting increments. Janet Yellen will be sworn in as the new chairwoman of the FOMC on Monday, replacing Ben Bernanke. Her first meeting of the FOMC will be March 18/19. As the FOMC unwinds extraordinary monetary policy, they will be following a sequence. First comes the end of asset purchases, next come increases in the Fed funds rate. The FOMC has established a 6.5 percent unemployment rate threshold for increasing the funds rate. They have given themselves sufficient wiggle room around their definition of a threshold to render it meaningless. We expect the first increase in the fed funds rate to come in 2015, after tapering has run its full course and well after the unemployment rate has fallen below 6.5 percent.
Fourth quarter 2013 real GDP growth matched consensus expectations of 3.2 percent after a strong Q3 growth rate of 4.1 percent. This is the best two-quarter performance since 2011Q4/2012Q1. Real GDP growth in the second half of 2013 was boosted by strong inventory accumulation which added 1.7 percent to the Q3 growth rate and 0.4 percent to the Q4 growth rate. We can reframe that by saying inventory accumulation has accounted for almost 30 percent of real GDP growth in the second half of 2013. Consumer spending and exports were strong in Q4. Government spending subtracted about 1 percent from Q4 real GDP growth. The drag from government will level out by the second half of this year.
House prices continue to climb across the country. The Case-Shiller 20-City Composite House Price Index for November was up 13.7 percent over the previous 12 months. All 20 cities showed a monthly gain in November after seasonal adjustment. New homes sales were soft in December, falling 7.0 percent to a 414,000 unit annual rate. Rising mortgage rates and bad weather were factors. Even worse weather in January is going to put the big chill on a lot of economic data, especially housing-related. The Pending Home Sales Index for December showed a similar 8.7 percent decline.
Labor data is feeling the chill. The interpretation of payroll job growth in January will be interesting. We may see some bounce back from a weak December reading, however, weather effects will likely play a role in next Friday’s January jobs report too. For the week ending January 25, initial claims for unemployment insurance were up by 19,000 to hit 348,000. Continuing claims for the week ending January 18 declined by 16,000 to hit 2,991,000. Continuing claims will dip early this year with the end of federal support for extended unemployment benefits. That issue is not yet dead in Washington. Senate Democrats are still pushing for a 3-month extension. The employment cost index for December is up 2.0 percent over the prior 12 months. This is a small uptick from previous reports, however, it does not yet signal a sustained acceleration in compensation costs.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly013114.