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All Eyes on the U.S. Economy

by ken | 08:51 in |

Eyes on the U.S. Economy

With only a couple trading days left in January, stocks are positioned to lock in four straight months of gains and finish with their best performance since 1997. Unfortunately, some momentum was lost last week after the government said the U.S. economy expanded at a slower-than-expected pace in the fourth quarter. For the week, the Dow Jones Industrial Average fell 0.5%, while the S&P 500 and Nasdaq notched modest gains.

Because the figures reported by the Commerce Department were lower than expected and stocks pulled back, should that lead us to conclude that economic growth was poor? Not at all. Gross domestic product, the broadest measure of the nation's economic health, grew at a 2.8% annual rate during the last three months of the year, which is a major improvement from the 1.8% we saw during the third quarter, and is the fastest growth we’ve experienced since the second quarter of 2010.

On the other hand, when you look closely at the numbers, there are some important points to note. One is that the majority of the growth came from one area – business inventories. Private businesses increased inventories $56.0 billion in the fourth quarter, following a decrease of $2.0 billion in the third. Of course that sounds wonderful, but it can also be a double-edged sword. While it shows that businesses are optimistic about the health of the economy and feel confident they can sell their goods, if sales fall short of expectations, it can create a financial burden for them in the future. Only time will tell how this works out.

Another important point is that “real final sales of domestic product” – GDP less the change in private inventories – only increased 0.8% in the fourth quarter, compared with an increase of 3.2% in the third. So while GDP as a whole picked up in the fourth quarter, real sales slowed down. This is likely one of the reasons why the Federal Reserve lowered its outlook for the economy in 2012, announcing that they expect it to grow between 2.2% and 2.7% this year.
What’s next? The week ahead is a heavy one for economic data that includes personal income, consumer confidence, auto sales, manufacturing, construction, and the key nonfarm payrolls figure at the end of the week. In addition to the economic news, nearly 100 companies in the S&P 500 will report quarterly earnings.

Why are all these numbers important? For months, U.S. economic indicators have taken a back seat to headlines out of Europe, but as confidence grows that the Eurozone will survive, focus should gradually shift back to the health of the U.S. economy. We’ll be watching this data and sharing our thoughts with you along the way.

Monday – Personal Income and Outlays
Tuesday – Employment Cost Index, Redbook, S&P Case-Shiller HPI, Chicago PMI, Consumer Confidence
Wednesday – Motor Vehicle Sales, ADP Employment Report, ISM Manufacturing Index, Construction Spending, EIA Petroleum Status Report
Thursday – Jobless Claims, Productivity and Costs
Friday – Monster Employment Index, Employment Situation, Factory Orders, ISM Non-Manufacturing Index

Data as of 1/27/2012 1-Week Since 1/1/2012 1-Year 5-Year 10-Year
Standard & Poor's 500 0.07% 4.67% 1.29% -1.49% 1.62%
DOW -0.47% 3.63% 5.59% 0.28% 2.87%
NASDAQ 1.07% 8.11% 2.22% 3.13% 4.54%
MSCI EAFE 1.08% 5.98% -10.15% -3.74% 3.09%
10-year Treasury Note (Yield Only) 2.03% N/A 3.38% 4.88% 5.07%

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. N/A means not available.

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