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U.S. economic growth is likely to have accelerated in the fourth quarter of 2009, primarily due to a lesser drag from inventory depletion. However, final domestic sales or demand is unlikely to have picked up significantly. Unless demand strengthens, the economy cannot see a lasting recovery. The importance can be gauged from the proportion of growth coming from this component. Latest GDP estimates show that final domestic demand accounted for roughly 84% of GDP growth.
Commerzbank is of the view that companies in particular drove economic growth in the fourth quarter, as they contributed to growth by increasing their output rather than drawing down their inventories. Inventory depletion slowed down notably from the uncertain period that prevailed in the aftermath of the Lehman bankruptcy filing. The increase in capacity utilization seen in the middle of 2009 has necessitated an increase in capital expenditures.
That said, a sustainable recovery is unlikely to have begun in the U.S. The beneficial effect from the inventory cycles could gradually wear away and the economy will left staring at a weak and unpalatable domestic demand environment. Financial firms have not been very successful in putting their houses in order and the recent threat posed by more stringent regulations should stifle the profitability of these firms and place strain on the credit environment. Added to these, highly leveraged consumers are left with little scope to spend and are unlikely to support recovery in a meaningful way.
Housing indicators have begun to show that the sector, sans stimulus measures, will gradually begin to slow down. Housing starts fell 4% month-over-month in January to a seasonally adjusted annual rate of 557,000 units compared to 580,000 units in November. The decline was due to a sharp retreat in single-family starts, while multi-family starts showed an increase. However, offering some consolation was an increase in single-family building permits to 508,000, with the total building permits rising by 10.9% to 653,000 units.
Meanwhile, the National Association of Home Builders reported that its housing market index fell to 15 in January from 16 in the previous month. Economists had expected a reading of 17. The present conditions index fell 1 point to 15 and the index measuring prospective buyer traffic eased 1 point to 12, while the future outlook index remained unchanged at 26. The association attributed the sluggish reading to consumer concerns about job security and competition from foreclosed homes on the market, which is impacting demand.
Manufacturing activity may also be topping out. The results of the Philadelphia Fed's manufacturing survey showed that its manufacturing index fell to 15.2 in January from 22.5 in December. The new orders index dipped 5.1 points to 3.2, while the employment index rose 1.6 points to 6.1. The inventories index, although improving to -1.6 from the previous month's -5.7, remained in negative territory. The 6-month outlook index rose to 43.3 from 35.9.
However, the Conference Board said its U.S. leading economic indicators index for the U.S. rose 1.1% in December following a 1% increase in November and a 0.3% rise in October. With this, the index has risen steadily for nine consecutive months. While the coincident economic index rose 0.1%, the lagging index fell 0.2%.
The producer price index for December rose 0.2% compared to the previous month. Economists had expected no change in prices. Excluding food and energy prices, core producer prices remained unchanged, while estimates were for a 0.1% rate. Core producer prices rose at an annual rate of 0.9% in December, softer than November's 1.2% rate. Food prices surged up 1.4% compared to a 0.4% decline in energy prices. Annually, producer prices were now up 4.4%, the highest reading since October 2008, as easier comparisons pushed the reading higher. Intermediate goods prices rose 0.5% month-over-month, suggesting rising inflationary pressures in the pipeline.
Given the fact that uncertainty has been driving market participants from riskier assets in recent sessions, the unfolding week with a few key economic reports on its calendar assumes importance. The FOMC meeting, the first read on the fourth quarter GDP, housing reports and consumer confidence readings would headline the week's economic calendar.
Traders may closely watch the post-meeting policy statement of the FOMC due to be released at the end of the 2-day FOMC meeting beginning Tuesday. Additionally, the advance fourth quarter GDP estimate to be released on Friday, the existing home sales and the new home sales reports, both for December, the Commerce Department's durable goods orders report for December, the Conference Board's consumer confidence index for January and the Reuters/University of Michigan's consumer sentiment index for January could be in the spotlight.
Other data that could be of interest to traders are the S&P Case-Shiller home price index and the Federal Housing Finance Agency home price index, both for November, weekly jobless claims and the ISM-Chicago purchasing managers' index for January. During the week, the Treasury Department is set to announce details of the auctions of 2-year notes (at 1 PM ET on Tuesday), 5-year notes (at 1 PM ET on Wednesday) and 7-year notes (at 1 PM ET on Friday), while President Barack Obama is scheduled to deliver the State of the Union address at 9 PM on Wednesday.
The Fed is unlikely to suggest an end to its near-zero interest rate policy at its January meeting, as the economy still grapples with unemployment and shaky consumer confidence, while facing a benign inflation environment. The central bank is most likely to allow the emergency liquidity programs to expire as per previous schedule.
Although the extension of the first-time homebuyer credit until April is expected to continue support home sales, homebuilding activity is seeing softness. A sustainable recovery in residential construction activity will materialize only when the jobless rate plunges further and foreclosures stall. New home sales for December are likely to show an increase, retracing some of the steep decline witnessed in November.
The Conference Board's consumer confidence index is expected to receive a boost from the equity market rally and signs of stabilization in the labor market. That said, confidence is likely to remain muted, given the uncertainty surrounding the recovery in the labor markets. According to BMO Capital Markets, still-depressed sentiment and balance sheet mending will keep consumers in a cautious mood this year.
Durable goods orders are expected to show strength, primarily due to resurgence in commercial aircraft orders. Boeing (BA) received 59 orders in December compared to 9 in November and 14 in October.
Meanwhile, helped by ample strength in exports and federal government spending along with a rise in inventories, the U.S. economic growth is expected to have accelerated to around 4% in the fourth quarter. BMO Capital Markets estimates a 2% increase in consumer spending in the fourth quarter from a 1% estimated underlying rate in the third quarter.
Monday
The National Association of Realtors is scheduled to release its report on existing home sales for December at 10 AM ET. Economists estimate existing home sales of 5.90 million for the month.
Existing home sales rose to a seasonally adjusted annual rate of 6.54 million units in November, with the upside coming from an increase in sales of single-family homes. Existing home sales reached their highest level in about 3 years. Economists had expected sales of 6.25 million units. Inventories measured on the basis of months of supply declined to 6.5 months from 7 in the previous month. The median sales price of an existing home declined 4.3% year-over-year.
Tuesday
The S&P/Case-Shiller home price index, which tracks monthly changes in the value of residential real estate in 20 metropolitan regions across the U.S., is scheduled to be released at 9 AM. Economists expect a 5% year-over-year decline in the 20-city composite house price index for November following a 7.28% drop in the previous month.
The Conference Board is scheduled to release its consumer confidence report for January at about 10 am ET. The report, which is based on a survey of 5,000 U.S. households, is expected to show that the consumer confidence index rose to 53.5 in December.
In December, the consumer confidence index rose to 52.9 compared to a revised reading of 50.6 in November. The expectations index rose 5.3 points to its highest level since December 2007, while the present situation index slipped 2.4 points to its lowest level since February 1983. Reflecting soft labor market conditions, those that said jobs are plentiful fell to the lowest level since December 1982.
The Federal House Finance Agency-FHFA is set to release its house price index for November at 10 AM ET. The index is a weighted, repeat-sales index, which measures average price changes of single-family houses in repeat sales or refinancings on the same properties. Economists estimate the increase in house prices to slow to a 0.1% rate from 0.6% in the previous month.
Wednesday
The Commerce Department is due to release its new home sales report for December at 10 AM ET. The consensus estimate calls for an increase in new homes sales to 370,000.
The payback effect of stimulus-induced home sales was evident in November's new home sales, which showed sales at a 355,000 annualized rate, marking the lowest level since April. In October, new home sales came in at 400,000. On the pricing front, the price of a new home declined 1.9% year-over-year but was up 3.7% compared to the previous month.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended January 22nd at 10:30 AM ET.
Crude oil inventories edged down by 0.4 million barrels to 330.6 million barrels in the week ended January 15th. Inventory levels of crude oil were above the upper level of the average range.
Distillate stockpiles declined by 3.3 million barrels, but yet remained above the upper boundary of the average range. On the other hand, gasoline inventories rose by 3.9 million barrels and were above the upper limit of the average range. Refinery capacity utilization averaged 80% over the four-weeks ended January 15th compared to 80.4% in the previous week.
The Federal Reserve Open Market Committee is scheduled to make an announcement regarding its near-term direction of monetary policy at 2:15 PM ET on Wednesday following the end of its 2-day monetary policy committee meeting. The Federal Open Market Committee consists of seven Governors of the Federal Reserve Board and five Federal Reserve Bank Presidents.
At its December meeting, as expected, the FOMC decided to maintain interest rates unchanged at 0-0.25% and reiterated its commitment to maintain ultra loose monetary policy for an extended period. The statement released following the end of the 2-day meeting in December did not show any significant change. The central bank retained its assessment that economic activity has continued to pick up, while it turned modestly positive on the labor market. The Fed commented that the deterioration in the labor market is abating. The Fed dropped its reference to businesses cutting staff and noted reluctance on the part of the firms to add to payrolls.
Thursday
The Commerce Department is set to release its durable goods orders report, which gives the value of orders placed for goods designed to last for more than 3 years, at 8:30 AM ET. Economists look forward to a 2% increase in durable goods orders for December.
In November, durable goods orders rose by 0.2%, reversing some of the 0.7% decline in October. An increase in orders for iron and steel, machinery and computers & electronics products helped to offset the sharp decline in commercial aircraft orders.
The Labor Department is due to release its customary jobless claims report for the week ended January 23rd at 8:30 AM ET. Economists expect a decline in claims to 450,000.
First time claims for unemployment benefits unexpectedly showed a significant increase in the week ended January 16th. Initial jobless claims rose to 482,000 from the previous week's revised figure of 446,000. The increase came as a surprise to economists, who had expected jobless claims to edge down to 440,000 from the 444,000 originally reported for the previous week.
Friday
The Bureau of Economic Analysis is due to release its advance fourth quarter GDP report at 8:30 AM ET. The report is likely to show that the U.S. economy expanded at a 4.6% rate in the quarter.
The third estimate of third quarter GDP showed 2.2% growth, revised down from the previous estimate of 2.8%. The downward revision reflected a bigger-than-expected draw down in inventories, smaller than expected spending on national defense, lesser-than-expected state and local government spending. Spending on equipment and software was also downwardly revised.
The Labor Department is scheduled to release its report on the employment cost index for the fourth quarter at 8:30 AM ET. The report sheds light on wages and salaries as well as benefits. The consensus estimates call for 0.4% increase in the employment cost index for the quarter.
The results of the Institute of Supply Management-Chicago's business survey for January are scheduled to be released at 9:45 AM ET. Economists expect the business barometer index based on the survey to come in at 57.4.
The institute's index of manufacturing activity rose to 60 in December from 56.1 in November, with a reading above 50 indicating growth in the sector. The increase came as a surprise to economists, who had been expecting the index to edge down to a reading of 55.1.
A turnaround in employment contributed to the improvement in the sector, with the employment index jumping to 51.2 in December from 41.9 in November.
The Reuters/University of Michigan's final report on the consumer sentiment index for January is scheduled to be released at 9:55 AM ET. The consumer sentiment index is expected to be revised up to 73 from the mid-month of reading of 72.8.
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