Monthly Economic Update February 2013


The S&P 500 opened 2013 with its best month since
October 2011 – and its biggest January gain in percentage terms since 1997.
Analysts felt the year might start with a positive month, but few expected a
5.04% breakout for the definitive Wall Street gauge. In fact, stocks around the
globe had a great month – and so did oil. A fiscal cliff deal was signed into
law, and a battle over the debt ceiling was postponed. Poor monthly indicators
didn’t do much to hobble real estate’s rebound. Consumer confidence surveys
offered mixed signals and the unemployment rate increased, but data showed households
spending, saving and earning more.1


While the American Taxpayer Relief Act of 2012 did extend
the Bush-era tax cuts for the middle class, it also approved a 2% payroll tax
hike for all working Americans. Nevertheless, Wall Street cheered the deal with
a big rally on the year’s first market day, even as the wealthiest households
reached for their aspirin in the face of higher income, investment and estate
taxes. The ATRA put off the federal spending cuts planned for January 2 until
March 1. On January 31, the Senate approved a bill authored by House
Republicans to temporarily suspend the federal borrowing limit through May 18.2,3

If Americans felt relief from this, it wasn’t demonstrably
reflected in key surveys. January’s edition of the Conference Board’s consumer
confidence index dropped 8.1 points to 58.6 (the lowest level in 14 months) while
the University of Michigan’s final January consumer sentiment survey rose a
mere 0.9 points to 73.8.4
The jobless rate ticked up to 7.9% in January, even
though non-farm payrolls expanded by 157,000 positions. (The Labor Department simultaneously
announced revised hiring totals from November and December – it turned out that
job creation averaged a solid 221,000 in those two months.) Personal spending
rose 0.2% in December, and early dividend payouts (and other factors) prompted
a 2.8% rise in after-tax incomes. America’s personal savings rate reached 6.5%,
a peak unseen since May 2009.5,6

Retail sales were up 0.5% in December. Touching
on retail prices, the Consumer Price Index was flat in December, showing just a
1.7% rise for the year – well under the Federal Reserve’s inflation target. Wholesale
inflation fell 0.2% in December and only rose 1.3% for 2012, the smallest annual
advance in the Producer Price Index since 2008.7,8
January’s most stunning economic news actually
pertained to the fourth quarter. The initial Q4 GDP estimate from the Bureau of
Economic Analysis was -0.1%, with reduced defense spending, a drop in exports
and a smaller-than-expected increase in inventories being the major factors.5
However, two globally respected measures of the
manufacturing and service sectors – the purchasing manager indices at the Institute
for Supply Management – both showed expansion for January. Last month’s ISM
manufacturing PMI rose to 53.1 from December’s downwardly revised 50.2 (and backing
that reading up, overall durable goods orders had increased 4.6% in December). Early
in January, ISM released its service sector PMI for December, which came in at 56.1.6,9,10


Faint signals of economic improvement could be
glimpsed in Europe. The Markit eurozone manufacturing PMI rose from 46.1 in
December to 47.9 in January, and Germany’s manufacturing PMI climbed to 49.8,
on the verge of expansion.

Eurozone annualized inflation moderated 0.2% to
2.0% last month – a low unseen since November 2010. Unemployment leveled off at
11.7% in the EU in December. All this aside, while the International Monetary
Fund projects global growth at 3.5% in 2013, it also forecasts an 0.2%
contraction in the eurozone economy this year following an 0.4% contraction for
A late-January Reuters poll of 250 prominent
economists projected growth in the Asia Pacific region moderating in 2013, with
the economies of Hong Kong, Singapore, and South Korea all forecast for GDP downgrades
of 0.4-0.5%. However, China’s GDP was projected to improve 0.3% to 8.1% in 2013
– which would still represent its smallest annual growth since 2000. Looking at
the HSBC PMIs for the region, China’s hit a two-year peak of 52.3 last month
while India’s was at 53.2; Taiwan’s was at 51.5, Vietnam’s at 50.1. HSBC PMIs
for Indonesia (49.7) and South Korea (49.9) showed January contraction.
Australia’s AIG PMI fell 4.1 points to 40.2, in negative territory for an
eleventh straight month.13,14


Gains were prevalent around the world. In Europe, the DAX went +2.15%, the CAC 40 +2.51% and the FTSE 100 +6.43%. In Asia, the Nikkei 225 rose 7.48%, the Sensex 1.11%, the Hang Seng 4.40% and the Shanghai Composite 5.05%; the KOSPI pulled back 2.49%. Looking at other benchmarks in the Americas, the
Bovespa sank 1.95%, the Bolsa gained 3.60%, the TSX Composite rose 2.02% and the MERVAL soared an astonishing 21.31%.15
Among regional indices, the S&P Asia 50 was flat (actually losing 0.04%), the Euro STOXX 50 gained 2.54%, the MSCI World Index climbed 5.00% and the MSCI Emerging Markets Index advanced 1.31%.15,16
Platinum was the hottest marquee commodity in January, rising 9.0% on the COMEX. Oil and
corn were also hot, both gaining 6.1%. Palladium
futures advanced 6.0%, silver futures 3.7% and copper futures 2.2%; gold
slipped 0.9% for the month. Other January performances: soybeans, +3.5%;
coffee, +2.2%; wheat, +0.2%; natural gas, -0.4%; cocoa, -1.4%; sugar, -3.7%. The
Thomson Reuters CRB Index had its best month since August, showing a 3.0% gain.
A 3.2% January ascent put the U.S. Dollar Index at 79.24 at the end of the


Shrinking inventory (the smallest supply of houses on the
market since May 2005) contributed to a 1.0% slip in existing home sales in
December. However, residential resales were up 12.8% for 2012, with
foreclosures and short sales accounting for 24% of transactions (down 8% from a
year before). New home sales dropped 7.3% in December but were up 19.9% in 2012 (the best
year for new home buying since 1983). Pending home sales fell 4.3% for
December. November’s Case-Shiller Home Price Index showed a 5.5% annual gain
across 20 cities, beating forecasts. Construction spending was up 0.9% in
December and the NAHB/Wells Fargo Housing Market Index maintained a 6-year peak
last month.9,18,19

Home loans grew more expensive in January. At
month’s end, Freddie Mac had the average interest rate on the 30-year FRM at
3.53% and rates on the 15-year
FRM, 5/1-year ARM and 1-year ARM respectively averaging 2.81%, 2.70%
and 2.59%. In Freddie Mac’s December
27 Primary Mortgage Market Survey, the average interest rates on those loans
were respectively 3.35%,
2.65%, 2.70% and 2.56%.20,21

Bears all but hibernated last month. The four most-watched
U.S. indices all scored big gains in January, including the Russell 2000, which
cracked the 900 ceiling and ended the month at 902.09. When the Dow has had a
positive January, it has had a positive year 82% of the time. The S&P 500 wrapped
up January at 1,498.11, the Dow at 13,860.58 and the Nasdaq at 3,142.31.1,22

The big question for February: can the Dow and
S&P reach all-time highs? On February 1, the DJIA rallied to close above
14,000 for the first time in over five years. On February 4, the Dow descended
nearly 130 points with new worries about higher sovereign bond yields in Spain
and Italy a big factor. The question analysts have pondered in the wake of the
market’s breakout is an old one: what exactly is validating the rally?
Unemployment has not lessened; the GDP reading from the fourth quarter was a
letdown. Still, real estate looks better, consumer spending has not tailed off,
the manufacturing and service industries seem to be expanding, and the Federal
Reserve is doing its part to provide continuing stimulus to the economy. There
is strong anticipation (some might even call it expectation) that the Dow and
S&P will close at all-time highs in the near term. Some analysts insist a
pullback is due, and warranted. Bulls counter with the argument that if the
market retreats this month, the biggest factor will simply be the psychology
that stocks should retreat, that this advance is simply too good to be true. In
the best-case scenario, the Dow reaches an all-time high this month attributable
to market fundamentals as well as confidence and excitement.28
calendar unfolds like so … ISM’s January non-manufacturing index (2/5), December
wholesale inventories (2/8), January retail sales and December business
inventories (2/13), January industrial production and the University of
Michigan’s preliminary February consumer sentiment survey (2/15), February’s NAHB
housing market index (2/19), the January PPI, the January 30 Fed minutes, and reports
on January housing starts and building permits (2/20), January’s CPI and
existing home sales and the Conference Board’s January Leading Economic
Indicators index (2/21), January new home sales, the Conference Board’s
February consumer confidence poll and the December Case-Shiller home price index
and FHFA housing price index (2/26), January durable goods orders and pending
home sales (2/27), and the second reading on Q4 GDP (2/28). Reports on January
consumer spending and vehicle sales and the final February University of
Michigan consumer sentiment survey arrive March 1, as does the February ISM
manufacturing index. February’s unemployment rate won’t be announced until
March 8 – that is when the Bureau of Labor Statistics issues its next monthly


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