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.
As we began the second week of December, Crude Oil had fallen to roughly $64 per barrel or about $40 per barrel less than where it stood early in July 2014. A barrel of oil holds 42 gallons, therefore a $10 price decrease equates to 24 cents per gallon. That is a fair amount of consumer spending capability that was going out our tailpipes. It is also believed that declining crude oil prices enhance Gross Domestic Product (GDP) which was recently revised to 3.9% for the 3rd quarter of 2014. Economists estimate a $25 decline in oil equates to about 50 basis points of increase for GDP. If this holds true, and oil continues at this low level, we could be pushing a 5% GDP number next year.
Meanwhile many of the traditional economic indicators are looking favorable. The Institute for Supply Management (ISM) registered 58.7 percent; a decrease of 0.3 percentage points from October’s reading of 59 percent, indicating continued solid expansion in manufacturing. In particular, the New Orders Index within the ISM registered 66 percent, an increase of 0.2 percentage points from the reading of 65.8 percent in October, also very favorable. Lower raw material costs were also viewed as positive for New Orders.
Employment data for November was generally very good; starting with Non-Farm Payrolls increasing by 321,000, while September and October had revisions that added another 44,000 to their previously reported jobs. The unemployment rate was unchanged at 5.8%. It is unclear how the new “amnesty” measures play into the U.S. economic picture. Critics of the President’s “amnesty” program say it would add as many foreign workers as there have been new jobs since 2009. Optimists say, since those folks are already here, the move might bring more tax revenue. It could also mean higher costs for social services. It will take a while before the real economic impacts of this decision are known.
Housing remains on a steady course for improvement. The Case-Shiller Index for Q-3 indicated home values had increased by 4.9% over the preceding year. New Home Sales stayed at roughly 450,000 annualized units, while existing home sales were about 5.25 million annualized units, up a little from the preceding month. Both building permits and housing starts were over 1 million annualized units, which is considered to be a healthy number.
Retail sales are not yet showing the punch that should eventually be seen with the money saved at the gas pump. Regardless, retail sales were up .3% last month after being flat in the prior month. The Producer and Consumer Price Indexes were up .4% and .2% respectively for October. We can expect to see a sizable decline in the non-core numbers, given the decline in commodity prices, and, in particular, oil. Regardless, the Core inflation rates should not be materially affected since food and energy changes to the ratio are considered transitory.
The general economic consensus continues to be for interest rates to remain at present levels for another 6 to 9 months, and then we will begin to see the Federal Open Market Committee push the overnight rate for Fed Funds up. The rate is presently .25% and we might see the rate go as high as 1.00% by the end of 2015, with a continuing trend for increases in 2016. Most economists do not see longer term interest rates moving up as quickly or as much.
Dennis A. Long
President & Chief Executive Officer
Pacific Financial Corporation
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