Economic Week in Review: Nothing easy about this rocky recovery
April 29, 2011
The U.S. is on the mend from the recession and financial crisis, but while the repairs are evident, the workers aren't yet ready to pack their tools and take down the scaffolding. The economic situation is serious enough that Fed Chairman Ben Bernanke held the first-ever news conference for the Federal Market Open Committee (FOMC) in addition to releasing a customary statement. Overall, the economic news this week was mixed. Real gross domestic product (GDP) grew at a slower pace in the first quarter than it did in the fourth quarter of 2010. Consumer confidence and the housing market are slowly improving, but still not at levels considered healthy. The stock market surged on good news and shrugged off the bad. For the week ended April 29, the S&P 500 Index rose 2.0% to 1,364 (for a year-to-date total return-including price change plus dividends-of about 9.1%). The yield of the 10-year U.S. Treasury note decreased 10 basis points to 3.32% (for a year-to-date increase of 2 basis points).
Fed continues course, adjusts forecast
After meeting earlier this week, the Fed amended some of its key forecasts but left its monetary policy unchanged. The central bank voted to keep the target federal funds rate in the 0% to 0.25% range, as it has since December 2008, "for an extended period," and complete its $600 billion purchase of Treasuries by June. The economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually," the Fed's statement said.
Mr. Bernanke also addressed the nation's key economic concerns in a live broadcast, where he empathized with the public. "A lot of people are having a very tough time, so I can certainly understand why people are impatient," he said.
The Fed slightly lowered its forecast for economic growth this year and raised its outlook for inflation, which is expected to decline again in 2012 and 2013. It also modified its view on employment, which it sees falling a bit more than earlier projected.
Economic growth eases
The U.S. economy is still expanding but at a slower pace. GDP, the value of all goods and services produced in the United States, grew at an annualized rate of 1.8% during the first quarter, according to the Commerce Department's first estimate. The rate of economic growth is down from 3.1% in the fourth quarter of 2010. Dragging on growth were cuts in government spending, including an almost 12% drop in defense spending and a 3.3% drop in state and local government spending due to state budget problems. In addition, imports grew more quickly than exports, business and consumer demand cooled off, and higher prices reduced spending-consumer spending, which makes up the largest part of the U.S. economy, climbed 2.7%, compared with 4.0% in the fourth quarter (both annualized).
"The GDP report was very weak, as expected, but it was in large part driven by transitory factors: the surge in energy prices, adverse winter weather, and cutbacks in public sector spending," Vanguard senior economist Roger Aliaga-Díaz, Ph.D., said. "Barring more negative surprises, we expect growth to pick up again in the following quarters this year."
New-home sales limp ahead
Sales of new homes increased more than forecast in March, but the shaky housing industry still remains a glaring trouble spot of the economy. New-home sales rose 11.1% from February to an annual rate of 300,000, and numbers for February and January were both revised higher. Still, sales are down 21.9% from a year ago--when the federal homebuyer tax credit was in effect--as builders deal with competition from foreclosures and the glut of existing homes on the market. Median sale prices climbed 2.9% to $213,800 from February but are 4.9% lower than March 2010. Also, the months of supply dropped to 7.3 from 8.2. Northeast sales were the healthiest, followed by the West and Midwest. Sales in the South dipped slightly.
Consumer confidence makes small advance
The Conference Board's index of consumer confidence reversed course in April following March's sharp decline. The growing job market and a rise in buying plans helped the index reach 65.4, a bit better than forecast, and March's number was revised upward to 63.8. Consumers' views of current and future business conditions both increased, boosted by climbing stock prices and improved inflation expectations. However, higher energy prices and the weak housing market are still a drag on the index, which remains below February's reading of 72.0.
Durable-goods orders increase
New orders for U.S. durable goods--goods designed to last at least three years--rose 2.5% in March, evidence of larger manufacturing demand and economic expansion. It was the third straight monthly gain as orders for February were revised higher after a decline was initially reported. Transportation led the way with a 5.9% advance. New orders climbed 1.3% excluding transportation, and 2.3% excluding defense. New orders for core capital goods grew 3.7%, also a positive sign for the economy. Core capital goods-nondefense capital goods excluding aircraft--include items such as computers and appliances and are a component of GDP.
Personal spending growth slows
Consumer spending rose 0.6% in March, backing off a bit from the previous month. Higher costs for energy and food triggered much of the growth as "real" spending-which removes the effects of price changes-was up just 0.2%. Spending on services outweighed spending on durable goods. Meanwhile, personal income increased 0.5%, a slight improvement. Rental, dividend, and transfer income--the latter from unemployment payments--drove the gains, and wages and salaries climbed more modestly.
Employment costs get a boost
Employment costs climbed 0.6% in the first quarter, led by a 1.1% surge in benefits. Growth in wages and salaries remained the same at 0.4%. Compared with a year ago, total compensation has increased 2.0%, wages and salaries 1.6%, and benefits 3.0%. Total compensation grew faster in the first quarter for employees in the private sector compared with the public sector because of local government budget constraints.
The economic week ahead
A fresh batch of data is due next week. Monday brings releases on construction spending and the Institute for Supply Management's manufacturing index. The wave of reports continues with factory orders Tuesday, the ISM nonmanufacturing index Wednesday, and productivity and costs Thursday. News on employment and consumer credit is scheduled 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 still have most of it left."
Seasick Steve
