Chief Executive Officer Newsletter
Welcome to the CEO's monthly economic newsletter. The newsletter provides a basic narrative overview of recently published economic indicators for your reading pleasure. You should not rely on this information when making investment decisions, but rather seek professional advice from qualified investment advisors.
The reign of Ben Bernanke as our Federal Reserve Chairman has come to an end and Janet Yellen is officially at the helm. It pretty much appears to be business as usual for the Federal Open Market Committee (FOMC) regardless of the change. In light of the cumulative economic progress, the Committee decided to make another $10 billion reduction in its asset purchases. But for future tapering, the FOMC will be paying close attention to the labor markets which recently sputtered. The FOMC has tried to make it clear that asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for labor markets and inflation.
The economy ended the year on a moderately positive note, with Gross Domestic Product (GDP) rising an annualized 3.2% in the advance estimate for the final quarter. This followed a 4.1% growth rate in the third quarter. The consensus had expected a 3.0% increase, so all is good…or is it?
The employment situation was disappointing again, as total payroll jobs in January rose 113,000. Expectations were for a 181,000 boost for jobs in January. Ideally we want to see non-farm payroll jobs increase by 200,000 or more jobs per month. The unemployment rate dropped to 6.6% from 6.7% in December. Most importantly, the overall labor force actually rebounded by 523,000 in January after dropping 347,000 the prior month, which means, for the first time in awhile, the improvement in the unemployment rate was not driven by people falling out of the labor force.
The Institute for Supply Management (ISM) Index for Manufacturing took a dive last month, signaling a very significant slowing in composite growth for January, at 51.3. This was down from 56.5 in December and is the lowest reading since May 2013, and the sharpest monthly drop since May 2011. The added bad news was centered, unfortunately, in new orders, which were down over 13 points. This is one of the largest monthly declines on record. If there is solace, it's that the plus-50 rate of 51.3 still points to monthly growth, just at a much slower pace than December. The ISM Index for Services remained stable last month at 54.0.
New home sales had been a bright spot in the housing sector -- but not anymore. Sales of new homes nosedived in December to a 414,000 annual rate that was below the low-end consensus. More bad news comes from downward revisions that total 30,000, affecting the prior two months. The drop in sales gave a lift to inventories, at least relative to sales, which was a 5.0-month supply vs. 4.7-month supply in November. Regardless, the total number of new homes on the market actually fell.
The 8.7% decline in pending home sales for December was more bad news for housing. This points to a sharp decline for what was already a soft existing home sales market. Lack of available homes for sale, together with higher prices, not to mention the soft job market, are all negatives pulling down home sales. Weather may have been a contributing factor in some markets. Here in the Northwest, however, real estate markets are improving.
One thing that appears to be fairly certain is that interest rates are going to continue to be relatively low throughout this year. Employment is still quite sluggish and inflation is well below 2% on a quarterly basis. Home loan rates are relatively attractive these days, but do not expect to see a return of 30-year fixed rates below 4% in the foreseeable future.
Dennis A. Long
President & Chief Executive Officer
Pacific Financial Corporation
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