Deller's two cents: Mostly good economic news this week, but the fact that the Vanguard Group notes the impact of state government fiscal issues is relevant here. States have three choices: cut spending, raise taxes or some combination of the two. Each will have economic pain associated with it and will put a drag on the economy. Will the drag be enough to throw us back into a recession? I seriously doubt it. But will it take some of the steam out of the recovery that is finally getting some legs under it? Most definitely.
Economic Week in Review: Good GDP news, but trimmed a bit
February 25, 2011
The U.S. economy grew 2.8% in the fourth quarter, the sixth straight quarterly increase, though the pace was more modest than an earlier estimate. Less spending by fiscally strapped state and local governments was one reason for the downward revision. Consumers also spent less than initially thought. For the week ended February 25, the S&P 500 Index fell 1.7% to 1,320 (for a year-to-date total return-including price change plus dividends-of about 5.3%). The yield of the 10-year U.S. Treasury note fell 17 basis points to 3.42% (for a year-to-date increase of 12 basis points).
GDP grows a bit less than expected
Real gross domestic product (GDP) rose at an annualized rate of 2.8% in the fourth quarter, below expectations and slower than the previously estimated increase of 3.2%. Several factors produced a slower pace of growth. Consumer spending-the largest increase since the first quarter of 2006-was nevertheless lower than the previous estimate. And state and local governments, which are still reeling from the recession-induced drop-off in tax revenues, cut spending more than anticipated. A "final" estimate of the quarter's GDP comes out late next month.
Consumer confidence climbs to a three-year high
For the fifth straight month, The Conference Board's index of consumer confidence increased and reached its highest level since February 2008. But, at a reading of 70.4, the index remains well below levels associated with strong economic growth. The gain was "due to growing optimism about the short-term future," said Lynn Franco of the private research group. "Consumers' assessment of current business and labor market conditions has improved moderately, but still remains weak. Looking ahead, consumers are more positive about the economy and their income prospects, but feel somewhat mixed about employment conditions."
Existing-home sales gain but new-home sales slide
Sales of existing homes rose in January, for the third straight month, while sales of new homes declined. Because of tight credit, there have been "abnormally high levels of all-cash purchases" of existing homes, said Lawrence Yun, chief economist at the National Association of Realtors. He also noted that a growing number of purchases are being made by investors. Sales of new homes fell by a larger-than-expected 12.6% in January after rising in December, and remain stuck near an historic bottom that was reached in the second quarter of last year. Analysts noted a variety of headwinds: competition from lower-priced distressed homes, high unemployment, tight credit, and (for potential trade-up buyers) negative equity.
Aircraft orders pump up demand for durable goods
Orders for durable goods rose 2.7% in January after declining for three months. The increase was driven by orders for commercial aircraft and other transportation equipment; excluding this category, orders fell 3.6%. Orders for nondefense capital equipment excluding aircraft-watched as a gauge of broad business spending plans-fell 6.9%.
The economic week ahead
A heavy week of reports is in the offing, including personal income and spending (Monday), construction spending and the Institute for Supply Management's manufacturing index (Tuesday), and the Federal Reserve's Beige Book (Wednesday). The week concludes with productivity, unit labor costs, and the Institute's nonmanufacturing index (Thursday), and the unemployment rate, nonfarm payrolls, and factory orders (Friday).
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Steven C. Deller
Professor and Community Development Economist
Department of Agricultural and Applied Economics
515 Taylor Hall --- 427 Lorch Street
University of Wisconsin-Madison/Extension
Madison, WI 53706
608-263-6251
"I started out with nothing and I have most of it left."
Seasick Steve
