U.S. GDP Revised Downward for Fourth Quarter

The United States’ economy grew slower than previously thought, said the Commerce Department on Friday.

The advance estimate of the real gross domestic product – the overall measure of economic output of  the United States – was 3.2 percent. The economy actually increased at a lower rate, 2.8 percent, said the Commerce Department.

Businesses were likely to be disappointed by the report. Economists’ median estimate for the revision was 3.3 percent, said Bloomberg News.

“The real story of the fourth quarter GDP was that the underlying demand was still pretty robust,” said Russell Price, economist for Ameriprise Financial, “But large fluctuation in business inventories and crude oil import volumes really made the report.”

An upward revision to exports helped offset downward revisions to government and consumer spending. Imports increased as well, which are subtracted from the GDP.

The economy grew by 2.8 percent instead of 2.9 percent for the whole of 2010. It shrank 2.6 percent over 2009.

Some economists expect continued improvement in consumer business demand, which is fundamental to sustainable economic recovery.

Price estimated 3.1 percent growth in the first quarter of 2011.

“I think we are now at a point where we should see solid improvements in employment growth going forward so long as higher energy prices do not offset the gains we are expecting,” Price said.

While the economy’s momentum has increased thanks to resurgent American consumers, rising oil prices could diminish their effect. Consumer confidence is also up to 77.5, up from 74.2 in January, said the Reuters/University of Michigan Survey. And there is still the problem of people with out jobs. It could be a while before we see some real improvement.

“Employment typically does lag the underlying economy,” Price said.

Declining home prices offset rise in sales

Existing home sales increased last month, but declining prices and a high percentage of distressed sales indicate that the housing market faces a long road to recovery.

The National Association of Realtors reported Feb. 23 that existing home sales increased 2.7 percent from December 2010 to a seasonally adjusted annual rate of 5.36 million. That number beat the 5.22 million projected by economists surveyed by Bloomberg News, as bargain hunters snapped up homes in spite of heavy snowfall across the country.

The median price for an existing home fell to $158,800, down 3.7 percent from 164,900 in January 2010, the report also noted. Fourth quarter home prices were down 4.1 percent from the year-ago period, according to the S&P/Case-Shiller National Index released on Feb. 22. That figure represented a drop to 2003 levels, and the worst year-to-year decline in the index since the third quarter of 2009.

Prices dropped even as consumer confidence reached a three-year high in February and unemployment fell to its lowest rate since April 2009.

“There’s not a lot of positive news in the housing sector,” said Scott J. Brown, chief economist at Raymond James & Associates. “We have a huge percent of distressed home sales, and the decline in prices will put more people underwater and lead to more distressed sales still.”

Distressed homes accounted for 37 percent of homes sales in January 2011, up from 36 percent market share in December 2010. The NAR began tracking distressed sales in October 2008. Distressed sales reached 49 percent in March 2009, but have mostly hovered around one-third market share.

The NAR report comes as the House Financial Services Committee considers a Republican-sponsored package of bills that would end the Obama administration’s foreclosure prevention initiatives.

Michael Englund, chief economist at Action Economics, said distressed sales would have to be flushed through the system for the housing market to recover.

“From the point of view of the business cycle, we want to get the foreclosures over with as soon as possible,” he said.

Sherry Cooper, executive vice-president at BMO Capital Markets, said that increased sales represented a liquid market and could be a silver lining in the context of broader economic recovery.

“A lot of jobs will need to be created before housing markets clear,” she said. “People want to move where the jobs are, but they may not move if they can’t sell their homes. So the improvement in liquidity is a very positive factor.”

Brown agreed that jobs would eventually drive a recovery in the housing market, but was less bullish on the importance of increased sales.

“A recovery in the housing sector will depend on job growth, which should arrive over time,” he said. “For the moment, things are pretty soft.”

Updated Mar. 2

Changes in Building Permit Codes Affected LEI Numbers

The number for January’s Index of Leading Economic Indicator (LEI) came out yesterday and they show that the U.S. is still increasing by 0.1 percent. For some this may look like bad news since the number was a decrease and much lower than those that came out in the last two months.

However, those high numbers in the LEI were mainly due to the specter of new building regulations that urged developers to get new building permits, according to economists.

It is really unlikely that the LEI will go below 0.1 or reach the negatives, which is a possible a sign of another recession. Nonetheless, don’t expect it to be any higher than 0.4 for at least the first quarter of this year.

“We saw technical factors influencing the swings,” said Michael Englund, chief economist at Action Economics LLC. “The building permits number which plummeted in Jan. will remain low for several months as we digest the building code change.”

In areas like Atlanta and New York, developers were trying to avoid being subjected to the new building permit codes of 2011. As a result between the months of Nov. and Dec., building permits rose from 544, 000 to 627,000.

While Englund believes this may affect the LEI number for quite a while, Ellen Beeson Zentner, senior economist at the Bank of Tokyo-Mitsubishi UFJ, thinks it will only keep the LEI low for no more than two months.

According to her, the permits that the developers requested in the latter part of 2010 were probably the ones they would have requested in the beginning of 2011.

“Overall for 2011, I don’t expect building permits to drag much on the LEI but I don’t expect it to be a boon for the LEI either,” Zentner said said.

The LEI is composed of 10 different indicators, which together is supposed to predict if we are heading towards a recession or a recovery. While permits remain low the many of the other indictors are likely to keep the LEI rising.

Indicators that were down because of the unprecedented winter snowstorms will rebound and add into the percentile growth. This includes an increase in average hourly manufacturing workweek and lower average of initial unemployment claims.

Consumer expectations are finally beginning to have positive affect and will likely grow mild but stead in the next few months.

Also the stocks will likely add to the LEI number along with the 10-year Treasury bond yield because of the Federal interest rates being so low.

All in all, it looks as if the economy will continue to move forward from the Great Recession with a solid GDP growth rate 3.5 until the end of this.

In December, the LEI was 0.8 and on November it was 1.1 percent.

Consumers Feel the Pinch as Economists Breath Sigh of Relief

Consumers are feeling the pinch as the rising cost of energy helped push up consumer prices in the United States last month, according to government statistics released on Thursday; easing the fears of many economists of a possible decline in prices repelling their fear of deflation.

The Bureau of Labor Statistics reported that the consumer price index rose to a seasonally adjusted 0.4 percent in February, the second straight month of growth. The index came in at a higher than projected 0.3 percent made by many economists across the U.S., according to Bloomberg.  The increase helped push the overall 12-month growth of the CPI to 1.6 percent.

Economists anticipated the core index rate, which excludes food and energy a measure that excludes highly volatile oil prices. This core rate rose 0.2 percent in January and was up 1 percent for the previous 12 months. A 1 percent rise in apparel prices accounted for the acceleration in the core index, according to the report.

“The main reason for the hike is the rising cost of doing business for many companies,” said Julia Coronado Chief Economist North America at BNP Paribas.

U.S. Economists forecast a 2.5 percent inflation rate this year; the steady increase seen in the last few months could make this a possibility.  This increase is good for the economy as it moves us away from the dreaded specter of deflation. It reflects of the confidence businesses have in consumers to absorb the increased price of goods.

However, the surge in the price of raw materials and fuel prices are beginning to cut into already tight budgets.  This is particularly troubling as consumers by wage stagnation and the weight of the slow economy struggle to maintain their homes.

“Rising fuel and energy prices are gobbling up household income,” said Michael Englund, Principal Director and Chief Economist for Action Economics, LLC.

Englund notes that food companies, retailers and manufacturers are becoming more willing to pass the buck- so to speak into the wallets of consumers.

The increase in prices could impact the Obama Administration’s recently passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which passed in early December to stimulate the economy. Economists fear that the modest gains provided by such a measure could be tempered by the rising cost of living.

Despite the pinch on consumers, economists see the new numbers as a sign of success by the Federal Reserve.

“The Fed tried everything possible to fight deflation,” said Nathaniel Karp, Chief U.S. Economist for BBVA Compass.

Karp is referring to the Federal Reserve Board’s decision to start a Treasury bond-buying program. The aim of the program was to inject life into the economy by lowering interest rates in an effort to increase lending, lift stock prices and encourage more spending to fuel the recovery.

“We now can stop worrying about deflation and how it will affect the market and should begin to look at the fiscal problems facing the country,” said Karp.  He adds, “Now we have to focus on making a good plan and a good strategy to face the challenges we have in education and job growth to stay competitive in the world

Retail Sales Slip Following Holiday Season

Retail sales fell in January, as a slow job market and rising gas prices kept consumers out of stores following the holiday season.

The advanced estimates for the United States retail and food service sales for January were $381.6 billion, an increase of 0.3 percent from the previous month, according to U.S. Census Bureau figures released on February 15.

While that number represents the seventh straight month of growth, sales failed to reach the 0.5 percent gain projection that was estimated by 79 economists in a Bloomberg News survey, tempering the sentiment that economic growth had spread to the retail industry.

“We had a very strong fourth quarter and it’s hard to keep that trend,” said Sean Incremona, senior economist at 4Cast Inc. “”I don’t think (retail sales) will continue as much going forward.”

Total sales during the months of November 2010 and January 2011 were up 7.6 percent from the same period a year earlier, but the 0.3 percent gain posted in January was the smallest since a drop in June.

While the harsh winter storms of January slowed down foot traffic in stores, the continuance of rising gasoline and food prices had more of an impact than the ice and slush on the sidewalks.

“The storms were there,” said Ryan Wang, an economist at HSBC Securities.  “But the signs were there regardless, spending has been moderate.”

Wang, who correctly estimated the 0.3 percent gain, said that while the numbers have been volatile the past few weeks, “there was no real surprise in the outcome.

“The weather impact really is kind of mixed,” said Incremona. “Building materials were a bit weak as a result, but most of the drop shouldn’t be attributed to it.”

Eight of the 13 major retail categories showed an increase in January, but demand at building material stores dropped 2.9 percent, an indicator of poor home sales. The National Association of Home Builders recorded a level of 16 on their sentiment index for the fourth consecutive month, with any level below 50 being described as poor by respondents.

But even with the slide in home sales, the retail market still depends on one thing; people having income from jobs.

“The key comes back to the labor market,” said Wang. “If we can see an increase there, then we could see even more growth.”

Weekly jobless claims declined by 22,000 to finish at 391,000. However, the bad weather  likely caused the aberration and does not paint such a sunny forecast for retail. Ultimately, it may come back to people just believing in the market.

“There needs to be a raise in consumer confidence,” said Incremona, who said that an increase would buoy spending. “I think we’ll continue to see fairly mild increases through the late spring.”

Jump in Producer Prices Raises Inflation Questions

Wholesale prices increased by 0.8 percent in January, exceeding some forecasters’ predictions. But economists said it’s too soon to sound the alarm on rising inflation, mostly because the overall economic recovery still remains weak.

The increase marks the seventh consecutive rise, following a 0.9 percent advance in December and a 0.7 percent advance in November, the Bureau of Labor Statistics reported on Wednesday. Continue reading Jump in Producer Prices Raises Inflation Questions

U.S. Trade Deficit Widened in December

The U.S. trade deficit widened by 6 percent in December, adding up to a record-high annual trade gap with China.

The trade gap with China lessened by 19.1 percent in December to $20.7 billion. But the total annual deficit last year added up to the largest deficit the U.S. ever had with any single country, topping up at $273.1 billion.

Exports rose by 1.8 percent to $163 billion but imports rose by 2.6 percent to $203.5 billion, resulting in a deficit of $40.6 billion. This is in line with economists’ median forecast of $40.5 billion. Continue reading U.S. Trade Deficit Widened in December

New Jobless Claims Drop Below 400,000

Initial jobless claims fell last week to the lowest level since July 2008.

In the week that ended on February 5th, new applications for unemployment insurance totaled 383,000, a decrease of 36,000 from the previous week’s 419,000, according to the Department of Labor.  This drop in claims far exceeded expectations of most analysts who expected a more modest decrease.

The number of claims for jobless benefits roughly indicates the number of workers that are laid off in a given week. Historically, a decrease in initial claims usually precedes a drop in the unemployment rate.

Last week’s drop is a continuation of an overall downward trend in initial claims since the summer of 2009, and a sign of gradually growing economy.

“We’ve had a saw tooth pattern ratcheting downward for the past three months through the holidays and what’s been an incredibly harsh and cold winter,” says Michael Englund, chief economist at Action Economics.

Englund points out that the steady decreasing in initial claims over the last three months coincides with other signs of an improving economy such as rising bond yields and an improving stock market.

The number of jobless claims can vary considerably from week to week depending on weather and holidays. The four-week moving average number of claims, a less volatile measure that softens irregularities caused by severe weather and holidays fell by 16,000 down to 415,500.  The same week last year saw a moving average of 473,500.

“This indication is very encouraging indeed, it exceeded expectations. But it could be a one time blip,” says Diana Fuchgott-Roth, director of the Center for Employment Policy at the Hudson Institute and Chief of Staff of President Bush’s Council of Economic Advisors. “If the trend continues, it will show we are headed towards more job creation.”

Nevertheless, one week’s claims falling below 400,000 is a psychologically significant milestone that might hint at an improving job market, according to Toon van Beeck, a senior analyst at IBIS World.

“We would love to pop open our champagne bottles because of this, but what we are really seeing is continued volatility,” says van Beeck. “Next week, claims might go far above 400,000, but if it consistently stays below that mark, it can spark confidence and employers will be more willing to add to their payrolls.”

The initial claims number comes after the government reported a paltry 36,000 increase in jobs for January.

The number of Americans that are continuing to receive unemployment insurance as of January 29th also fell by 47,000 to 3.88 million.  This number has also been dropping gradually since peaking in March of 2009 at over 6 million.

When taken together with emergency unemployment benefits available in states that meet certain unemployment thresholds, the total number of people receiving some form of unemployment insurance tops 9.4 million.

This number only represents a fraction of Americans that remain unemployed, as not all unemployed workers are eligible for benefits.  A great fraction of the decrease in unemployment insurance recipients represents those whose benefits have been exhausted, but have not necessarily found employment.