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Moderate Growth Heading Into 2014 January 30, 2014 Economic indicators released since the last national update suggest the economy accelerated in the sec- Chart 1 Third Quarter 2013 Growth Estimates Kept Growing Percentage points ond half of 2013. The final national income and prod- 4.5 uct accounts release for third quarter 2013 revised 4.0 real gross domestic product (GDP) growth upward for 3.5 a second time to 4.1 percent at a seasonally adjust- 3.0 ed, annualized rate. This reading improved from No- 2.5 vember’s 3.6 percent estimate for the third quarter, with gains in real personal consumption expenditures (PCE) growth (Chart 1). Private-sector estimates for fourth quarter 2013 growth were revised upward, reflecting positive signals from consumption, manu- 2013:Q3 Adv release 2013:Q3 2nd revision 2013:Q3 Final 2.0 1.5 1.0 0.5 0.0 -0.5 GDP facturing and investment. Final sales to domestic purchasers PCE Nonres. Residential Inventories Net exports Federal State and fixed investment government local govt. investment Investment The December employment report from the Bureau SOURCE: Bureau of Economic Analysis. of Labor Statistics (BLS) revealed mixed news on the prices and less household debt continues to improve state of the labor market. The discrepancy between household balance sheets, which will support con- the payroll survey’s employment figures and the sumption expenditures, thus strengthening growth in household survey’s decline in the unemployment rate 2014. may be due to weather. Core inflation continues to run below target, while long-run expectations remain anchored. Capital Investment Steady Investment growth remains steady despite a temporary drag from bad weather on residential investment Consumption Leads Strong Fourth Quarter indicators. According to the Census Bureau’s advance Growth report, durable goods orders continue to trend upward, The January Blue Chip consensus estimates have despite some slowing in December and downward revi- edged up, putting fourth quarter 2013 GDP growth sions to November estimates. Business equipment or- 0.8 percentage points higher than December’s fore- ders grew 2.6 percent in November, followed by a 1.3 cast of 1.6 percent. This upward revision is supported percent decrease in December. However, with healthy by strong real PCE growth at 5.0 and 6.4 percent an- balance sheets, less economic uncertainty from the nualized rates for October and November, with par- euro zone and less fiscal drag with a new government ticularly strong growth contributions from durable spending deal, the downside risks to investment ap- goods purchases. This suggests a strong contribution pear moderate. from PCE to growth in the fourth quarter. Housing data also showed fewer gains in December. Despite revisions to third-quarter growth and strong Housing starts ticked down from 1,107,000 to 999,000 PCE contributions in the fourth quarter, the Blue Chip and permits from 1,017,000 to 986,000. However, consensus remains steady for first quarter 2014 at growth continued in most areas not affected by in- 2.5 percent. However, momentum from rising house clement weather. The West added 35,000 starts at an Federal Reserve Bank of Dallas National Economic Update 1 Chart 2 Manufacturing and Capacity Continue Normalizing Percent 82 80 one-off events, and conditions should normalize in the Percent* 10 Manufacturing capacity utilization (avg.): 1972-2012 78 76 Industrial production: manufacturing Manufacturing capacity utilization 70 Manufacturing continued to expand in December, ac- 0 cording to the Institute for Supply Management’s -5 68 66 '05 '06 '07 '08 '09 '10 '11 '12 slightly below November’s figure at 57.0 points but still above reports from the previous three years. The -15 more current indicator of industrial production from -20 '00 '01 '02 '03 '04 *12-month percent change Manufacturing Index. The December survey was -10 64 62 Manufacturing Trends Upward 5 74 72 coming months. '13 the Federal Reserve Board firmed for the fifth consecutive month. Likewise, manufacturing capacity utilization continues to normalize, registering just 1.5 per- NOTE: Shaded areas indicate recessions. centage points below long-run averages (Chart 2). SOURCE: Federal Reserve Board. This indicates improvements, but slack still remains. Chart 3 A Cold December Disrupts Work December Payroll Numbers Chilled With Weather Thousands* 450 400 The December Current Population Survey from the 350 BLS ticked down headline unemployment from 7.0 to 300 273 250 December average: 138 200 6.7 percent. The four-week moving average of initial claims continues to trend downward after some unevenness in fourth-quarter weekly claims. This con- 150 trasts with the Current Employment Statistics report 100 that the U.S. economy added 74,000 new jobs in December, disappointing forecasters’ expectations of 50 0 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 200,000. This is most likely due to weather-related *Not at work due to bad weather in December impediments. Chart 3 shows 273,000 employees not SOURCE: Bureau of Labor Statistics. at work due to bad weather, the highest December Chart 4 Inflation Growth Is Level but Low reading since 1977 and approximately 135,000 above Percent* 2.5 Percent* 2.5 Sticky CPI 2 the historical December average. The weakness in payroll numbers is probably a one-time deviation from the trend and is anticipated to normalize in January. 2 Core Inflation Bottoms Out Core CPI 1.5 1 Trimmed Mean PCE Core PCE 0.5 1.5 1 0.5 Core inflation measures ticked up slightly in November and December. Chart 4 shows that the Federal Reserve’s preferred measure of price growth, core PCE, grew 1.1 percent year over year in November. Comparable core Consumer Price Index (CPI) growth re- 0 0 '10 '11 '12 '13 *12-month percent change SOURCES: Bureau of Labor Statistics; Bureau of Economic Analysis; Federal Reserve Bank of Dallas; Federal Reserve Bank of Atlanta. mained flat at 1.7 percent. These growth rates, along with alternative measures of the Atlanta Fed’s stickyprice CPI and the Dallas Fed’s Trimmed Mean PCE, are annualized rate, while heavily affected regions of the below Federal Reserve targets, but the University of Midwest and South had 74,000 and 59,000 fewer Michigan’s long-run inflation expectations for CPI re- housing starts, respectively. Housing permits, which main anchored at 2.9 percent, according to its Janu- are forward-looking, grew in both the West and the ary Survey of Consumer Attitudes and Behavior. Northeast by 15,000 and 12,000 units at an annual- The overall economy continues to show signs of im- ized rate, while permits in the South and Midwest declined by 28,000 and 30,000, respectively. The coincident bad weather and weak housing reports are likely Federal Reserve Bank of Dallas provement, and the increasing frequency of these signs is hopeful. Consumer demand is strengthening National Economic Update 2 in regard to consumption and improved balance sheets, and businesses continue to grow production and utilize more capacity. A slowdown in emerging markets and lower-than-desired inflation pose downside risks, but on the whole, 2014 has a promising start. —Camden Cornwell …………………………………………………………………………………… About the Author Cornwell is a research assistant in the Research Department at the Federal Reserve Bank of Dallas. Federal Reserve Bank of Dallas National Economic Update 3
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