Overall, the U.S. Economy continues to improve and, as the U.S. economy improves, so too does the world economy. All of the U.S. economic leading indicators we follow, point to a strengthening economy coming to 2014. Gains were positive and fairly widespread across all areas, especially for manufacturing orders and employment. Our economy will continue to be assisted by the Fed, as they will continue to pursue easy monetary policy in order to support economic growth and they will do this well into 2015. Granted, the Fed started tapering its quantitative easing program at the beginning of January, reducing its bond purchases by $10B. However, the Fed will not exit the bond buying program completely until sometime in 2015 at the earliest.
When looking at all the economic data we follow, the U.S. economy is well positioned to improve on a year-over-year basis. Globally, Europe appears to be lagging the U.S. economy by about a year. But, like the U.S., they too appear to have made the turn to recovery and we anticipate further economic improvements. On the other hand, emerging economies will lag the rest of the world as they work through fundamental economic issues.
Here is a summary of some important economic indicators, showing historical information and areas of potential risk that could threaten the economic recovery in the U.S.A.
Mostly sunny with a chance of clouds. Consumer Spending continued to show moderate growth this quarter. Although recent headlines would imply a terrible holiday season, the 4Q 2013 Retail Sales were 4.4% higher than the same period in 2012. Annual comparisons show Retail Sales up 4.2%. Hardly reasons to be pessimistic. Overall, we believe the consumer is feeling more positive coming into 2014 than they have in quite some time.
Having said that, we expect the rate of growth to edge slightly higher into mid-2014 before flat-lining the last half of the year. Softness will primarily be the result of lackluster employment gains, minimal wage growth and mild inflationary pressures. The consumer may also be buffeted by rising healthcare costs for health insurance and the potential for an increase in taxes.
Mostly sunny. Wholesale Trade of Durable and Nondurable Goods are growing at an annual rate of 3.8% and 3.7%, respectively. Growth is accelerating for Wholesale Trade of Durable Goods, but the pace of ascent will ease in the second half of 2014. Wholesale Trade of Nondurable Goods is growing at a steady rate and will likely continue to in the near term. However, we expect growth to moderate in the second half of 2014.
Mostly sunny. US Industrial Production is in a positive trend, improving in November and December while Annual Total Manufacturing Production increased 2.6% year-over-year. Overall, US Industrial Growth has held steady around this level for the past six months and will continue in the near term. Another positive sign, employment in the manufacturing sector is improving, indicating businesses are slowly ramping up personnel to meet increased demand. Looking forward, we will likely see a period of acceleration in the first half of 2014 before moderating in the second half.
Mostly sunny. The 10-year Treasury yield rose 18 basis points in November, the largest one-month gain since August. Yields were 2.84% recently after hitting a high of 3.04% at the end of 2013. The Fed has finally started the process to relaxing quantitative easing (QE). Fortunately for bond holders, the Fed looks like it will be slow to fully unwind QE, at least in the near term. The political front also looks to be moderating as both Republicans and Democrats appear to be working together to fund the government for another two years and are not planning to implement new taxes (although they may allow tax credits to expire). Given on that, the threat of self-inflicted shocks that could negatively affect economy, have greatly lessened.
Mostly Sunny. The growth trend continues for Non-defense Capital Goods New Orders. November metrics show business-to-business purchases increased 3.6% during the year-ending in November. This is good news for the near term and we believe we will see continued growth into the second half of 2014. In addition, the Small Business Capital Expenditures Plans Index shows that small businesses are expecting to move forward with large investments, albeit hesitantly. With small businesses accounting for 54% of all US sales this measures a large portion of the capital expenditures in the US. Based on our reading of the economic indicator, we anticipate moderate growth through 2014 and into 2015.
Mostly sunny. National housing starts continue to be somewhat volatile. Year-over-Year, Building Permits are up 17.5%, Housing Starts are up 2.9% and Housing Completions are up 3.7%. In addition, Existing Home Sales posted their best increase in 5 years rising 10.1% and home prices continue to rise across the country improving over 10% from year-ago levels.
Mortgage interest rates have stabilized and with it, the housing market has as well. The National Association of Home Builders (NAHB) Housing Market Index (HMI), a gauge of homebuilder sentiment continues to hover around 60 after hitting a low of 57 in December. Looking at the three-month moving averages for regional HMI scores, the Northeast and West each rose four points to 42 and 63, respectively, while the South held steady at 56 and the Midwest a notch to 58.
Mostly sunny with a chance of clouds. The World Bank raised its forecast for global growth for the first time in three years suggesting the world economy is finally beginning to recover from the global financial crisis. However, the World Bank reduces its forecast for developing countries saying they are now growing at a rate much closer to their underlying sustainable rate of growth.
International economic indicators continue to be mixed but generally positive. At this juncture, the UK appears to have moved forward in growing their economy as they continued to post better than expected economic data. The European Union also appears to have made progress in addressing their economic woes. November Industrial Output, excluding construction, was up 1.8%, its strongest reading since May 2010. Capital Goods Orders were up 3%, Durable Goods were up 2.2% and Retail Sales jumped 2.6% to match the steepest increase on record. Additionally, European Union Economic Sentiment climbed 1.6% to its highest level since May 2011.
In Asia, mixed economic data was reported. China initially reported positive Factory Output that indicated that overall expansion in China’s manufacturing sector was moderating. Then they reported disappointing Purchasing Managers Indexes for both Manufacturing and Services. It appears China is continues to work through some internal weaknesses.