Economic Week in Review: Fed's outlook brighter but stocks shaky
March 18, 2011
Gradual improvements in the labor market helped lift the Federal Reserve's outlook for economic recovery, though construction remains a drag. Food and energy prices jumped, with core inflation still modest. But investors were perhaps more distracted by declines in stock prices during the week in the wake of Japan's earthquake-tsunami-nuclear woes. For the week ended March 18, the S&P 500 Index fell 1.9% to 1,279 (for a year-to-date total return-including price change plus dividends-of about 2.2%). The yield of the 10-year U.S. Treasury note fell 12 basis points to 3.28% (for a year-to-date decrease of 2 basis points).
The Fed sees a firmer economy and 'subdued' inflation
The Fed upgraded its economic outlook, according to the Federal Open Market Committee's monetary policy statement released this week. The economic recovery "is on a firmer footing, and overall conditions in the labor market appear to be improving gradually," the Fed stated. The central bank's earlier view was that the rate of recovery wasn't fast enough "to bring about a significant improvement in labor market conditions." Although the prices of oil and other commodities have been rising sharply, the committee observed that "longer-term inflation expectations have remained stable, and measures of underlying inflation have been subdued." The committee didn't change its 0% to 0.25% target for the federal funds rate-in place since December 2008-nor its plan to purchase $600 billion in Treasury bonds through June of this year, which is designed to support the economy's recovery.
Consumer and producer prices post strong increases
Climbing energy and food prices bloated the level of inflation in February. But, if energy and food prices are excluded-a gauge known as "core inflation"-a tamer picture emerges. The core rate of increase was 0.2% for both producer prices (which measure what manufacturers and wholesalers pay for goods and materials) and consumer prices. Producer prices for finished goods, including energy and food prices, surged 1.6%, double the prior month's rate. The consumer price index rose 0.5%, up from 0.4% in each of the prior two months, both of which are considered strong gains.
New construction falls sharply
Construction activity in the housing market dropped off, remaining at historically low levels. Housing starts declined 22.5% in February to an annual rate of 479,000 new homes. The construction of single-family homes fell 11.8% for the period, while the multifamily home sector plunged 47.0%. The multifamily home sector, which consists of buildings with five units or more, tends to be volatile. Last month's drop was preceded by an 87.4% increase in January.
Building permits, considered a good indicator for future housing starts, also fell in February. Permits dropped 8.2% from January, reaching their lowest level since 1959 when the government first began tracking building permits.
Index of leading indicators shows gains
The Conference Board's index of leading indicators rose 0.8% in February, its eighth consecutive gain. Eight of the survey's 10 components increased, led by a widening yield spread-largely reflective of the Fed's policy to keep interest rates near zero-and fewer jobless claims. The two weakest components of the index reflected declines in building permits and new orders for manufactured goods. While some of the gains last month may have resulted from weather and other temporary distortions a month earlier, economists said they are more confident in the recovery.
Industrial output slips
Industrial production fell 0.1% in February largely because warmer weather slowed production at utility companies-output dropped 4.5% as demand for heating declined following two months of unseasonably cold temperatures. Manufacturing production rose 0.4%, boosted by ramped-up production at motor vehicle and parts factories. Industrials used 76.3% of total capacity, slightly below a month earlier and 4.2 percentage points under the long-term average.
The economic week ahead
The highlight of next week's economic reports will be Friday's release of its final estimate of gross domestic product figures for the fourth quarter of 2010. Other reports expected next week include: existing-home sales (Monday), new-home sales (Wednesday), and durable goods orders (Thursday).
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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
