Resolution in the new year?
While economic reports out this week tended to align with expectations, some bright spots included signs of a continuing recovery in the housing sector. Indicators for manufacturing and services also signaled expansion in these sectors. The unemployment rate, however, remained unchanged amid continued slow job growth. Markets initially took heart that the “fiscal cliff” had been averted, but sentiment cooled as it became clear that the compromise deal left many thorny issues unresolved, including how to rein in the federal deficit. For the week ended January 4, the S&P 500 Index rose 4.6% to 1,466. The yield on the 10-year U.S. Treasury note rose 20 basis points to 1.93%.
For 2012, which ended Monday, the total return for the S&P 500 Index—including price change plus dividends—was 16.0%. The yield of the 10-year Treasury note fell 11 basis points to 1.78%.
The labor market dial didn’t move much
Payrolls rose by 155,000 in December and the unemployment rate sat unchanged for the month at 7.8% after an upward revision to November’s figure, according to the U.S. Department of Labor. In both 2012 and 2011, the monthly payroll increases averaged about 153,000, which eased the unemployment rate down from 9.3% over that period. The number of long-term unemployed, those without a job for more than 27 weeks, held steady compared with November at around 40% of the unemployed.
Health care was a bright spot, adding around 45,000 jobs. Post–Hurricane Sandy rebuilding may have helped boost employment in both construction and manufacturing, which each added between 25,000 and 30,000 jobs. For the third consecutive month, however, governments shed jobs, with cuts at the federal and local levels contributing to a loss of some 13,000 public sector positions during December.
Fed minutes show a less united front
Minutes from the December 11–12 meeting of the Federal Open Market Committee painted a slightly more nuanced picture regarding the future direction of monetary policy. At the close of the meeting, the committee announced it would link monetary easing to specific levels of employment and inflation rather than to a calendar range in order to provide greater transparency regarding its decision-making process. Although the committee had previously stated that it expected short-term interest rates to remain exceptionally low at least until mid-2015, the markets were surprised by the minutes, which noted that “several” members believed that the Federal Reserve’s ongoing bond buying programs might no longer be warranted by the end of 2013 or even earlier.
Construction shows contrasting trends
For the first time in eight months, overall spending on construction dipped by 0.3% in November compared with a month earlier. Faced with weak demand for retail and office space, commercial construction fell for the fourth time in six months. And with government finances still shaky, spending on public works has yet to make a substantial recovery. Disruptions from Hurricane Sandy likely played a part as well in the poor performance.
Home construction, on the other hand, has been bucking the trend. Demand created by historically low mortgage rates and dwindling supply helped push spending on new single-family home construction up 1.3% compared with October and 29.4% higher than a year earlier. Spending on new multifamily homes was positive as well, climbing 0.5% compared with October and 45.9% higher than in November 2011.
Manufacturing revives following Hurricane Sandy
The latest Institute for Supply Management (ISM) survey of manufacturers indicated that activity picked up in December after contracting slightly in the storm’s aftermath. The improvement was modest, however, with the index rising to 50.7 compared with 49.5 for the previous month. A figure above 50 indicates expansion.
The survey showed that while new orders were flat and production slowed, the number of jobs in manufacturing resumed its trend upward and new export orders indicated the first increase in foreign demand for U.S.-manufactured goods in seven months.
Services sector gains momentum
The ISM’s December nonmanufacturing survey showed an unexpected upturn in the services sector, a key component of the U.S. economy. The index climbed to 56.1 from 54.7 in November. New orders increased for the 41st consecutive month, although some of the improvement in December might be attributable to a year-end effect. And employment increased for the fifth consecutive month with the most jobs being added in the fields of education, retail, finance, and construction.
Factory orders signal solid business spending
Revised figures for November factory orders continued to show strength in core capital goods orders. This component is closely watched as it’s considered a proxy for business confidence and investment spending. Automobile shipments were another positive in the report. Hurricane Sandy has contributed to strong demand for replacements for vehicles lost in the storm.
The economic week ahead
Next week will be light for economic reports: The Federal Reserve Board will provide an update on consumer credit patterns on Wednesday and the Census Bureau will publish November’s import and export figures on Friday.
Source: The Vanguard Group Inc.