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Economic Outlook Finely Balanced


Despite advance estimates revealing softer than expected fourth quarter economic expansion in the U.S., the growth was still above trend at 2.8 percent. Deutsche Bank expects the economic growth in the current year to be just strong enough to preclude the Fed from engaging in further quantitative easing. The firm sees a moderately above-trend growth and a moderate pace of improvement in the labor market. However, one should be wary of the lingering euro crisis and the potential ramification it can have on the global economy, should the situation worsen.

The leaders of the European Union are meeting in Brussels later in the day, primarily to discuss the fiscal pact and Greece. Greece may not make much progress without an agreement with its private sector creditors, which has proved elusive despite protracted discussions.

Reflecting the fiscal pain faced by even core eurozone nations, French President Nicholas Sarkozy announced that the nation will unilaterally implement a tax on financial transactions, starting August. This is seen as a move to shrink the nation's fiscal deficit.

With uncertainties concerning overseas as well as domestic economies abounding, the economic trajectory over the next couple of years is likely to be fairly fragile, bouncy and uneven. Policymakers should tread a cautious line so as not to upset the growth applecart, while at the same time continuously scouting for ways to preserve and nurture growth.

Following the conclusion of the 2-day monetary policy meeting last week, the Federal Reserve said it expects economic conditions over the medium term to warrant exceptionally low levels for the federal funds rate at least through late 2014 compared to its earlier view of keeping interest rates unchanged till the middle of 2013.

Much of the remainder of the statement was maintained unchanged, while the central bank reiterated its commitment towards implementing its already announced bond buying program.

Updating its economic forecast, the Fed lowered the central tendency of its 2012 GDP forecast to 2.2-2.7 percent from 2.5-2.9 percent. The 2013 forecast was also lowered to 2.8-3.2 percent, but the 2014 forecast was upwardly revised to 3.3-4 percent from 3-3.9 percent.

The unemployment rate projections were lowered for all three years, while for core PCE inflation, the Fed upwardly revised the high end of its 2012 forecast and also nudged up its forecast for 2013.

In a landmark event, the central bank also unveiled the interest rate forecast of the FOMC members, with most members expecting normalization to begin by the end of 2014. They also see the possibility of QE3 later in 2012.

A report released by the National Association of Realtors showed that pending home sales fell 3.5 percent month-over-month in December. Sales declined in the South, West and Northeast, while the Midwest experienced a modest increase.

U.S. new home sales unexpectedly declined by 2.2 percent to a seasonally adjusted annual rate of 307,000 units in December. Thus, the metric reversed the previous month's 2.3 percent increase. Additionally, there were downward revisions to the previous three months. Inventories measured in terms of months of supply were almost unchanged at 6.1.

The Conference Board reported that its leading indicators index rose 0.4 percent month-over-month in December. The lagging and coincident indicator indexes rose 0.3 percent each. The Treasury yield curve, initial jobless claims and average workweek made positive contributions to the leading indicators index, while consumer expectations served as a drag.

Several first-tier economic reports are due in the unfolding week and these reports could provide further clarity into the economic outlook. The monthly non-farm payrolls report for January, a private sector job report by ADP, considered a precursor for the former, the results of the Institute for Supply Management's manufacturing and non-manufacturing surveys, a regional manufacturing survey, the weekly jobless claims report and the Conference Board's consumer confidence report are among the market moving reports of the week.

Traders may also focus on the S&P Case-Shiller house price index for November, the Commerce Department's construction spending and factory goods orders reports for December and announcements concerning the Treasury auctions of 3-year and 10-year notes and 30-year bonds. The fourth quarter employment cost index, the preliminary fourth quarter productivity and costs report and a couple of Fed speeches round up the economic events of the week.

Payrolls are set to expand yet again in January, although at a much more modest pace than in December, which saw a boost from hiring by couriers and messengers. The expectations for payroll gains are based on the recent positive data on the jobs front. Jobless claims have been trending well below the 400,000 level. Nevertheless, the jobless rate is expected to stay flat.

The Institute for Supply Management's national manufacturing survey should bring in good tidings. The headline manufacturing index is expected to rise for the third straight month. According to BMO Capital Markets, the sector stands to benefit from strong business spending, buoyant auto production and a firm export trend. The service sector survey is also expected to show improvement as reflected by increasing confidence in the economic outlook.


The Bureau of Economic Analysis is due to release its personal income & outlays report for December. Economists expect the report, which is due out at 8:30 am ET, to show that personal income as well as personal spending rose 0.1 percent each from the previous month.

U.S. personal income and spending both increased at slower than expected rates in November. Personal incomes increased by $8.5 billion, or just 0.1 percent, in November, while consumer spending, formally known as personal consumption expenditures, also edged up by 0.1 percent.


The Labor Department is scheduled to release its report on the employment cost index for the fourth quarter at 8:30 AM ET. Economists expect a 0.4% in the index for the quarter.

The S&P/Case-Shiller home price index, which tracks monthly changes in the value of residential real estate in 20 metropolitan regions across the U.S., is scheduled to be released at 9 am. Economists expect a 0.4 percent month-over-month drop in the 20-city composite house price index for November.

The S&P Case-Shiller 20-city home price index fell by a seasonally adjusted 3.4 percent year-over-year, with the index declining to its lowest level since March 2003. On a month-over-month basis, the index was down 0.62 percent.

The Conference Board is scheduled to release its consumer confidence report for January at 10 am ET. The report, which is based on a survey of 5,000 U.S. households, is expected to show that the consumer confidence index fell to improve to 53.3 in January.

The consumer confidence rose to 64.5 in December from 55.2 in November. The index was at its highest level since April. The expectations index jumped 10 points to 76.4 compared to an 8.4 point-increase by the present situation index to 46.7. The individuals saying jobs were plentiful rose to the most since January, while the individuals saying jobs were hard to get fell to the least since January 2009.

The results of the Institute of Supply Management-Chicago's business survey for January are scheduled to be released at 9:45 am ET. Economists expect the business barometer index based on the survey to rise to 63.

The business barometer edged down to 62.5 in December. The new orders index slipped 2.2 points to 68 and the production index dipped 1 point to 66.2, while the order backlogs index rose 2.8 points to 57.9. Meanwhile, the employment index was up 1.7 points to 58.6.


Individual automakers are scheduled to release their monthly U.S. sales results for October. The data will reveal the unit sales of domestically produced cars and light duty trucks, including sports utility vehicles and mini-vans, during the month. Economists expect domestic vehicle sales of 13.2 million for October compared to 13.1 million in September.

The ADP National Employment report, which sheds light on non-farm private employment, is scheduled to be released at 8:15 am ET. The report is usually released two days prior to the Labor Department's employment report. The consensus expectations are for an addition of 172,000 jobs by the sector in January following an addition of 325,000 jobs in December.

Philadelphia Federal Reserve Bank President Charles Plosser is due to speak to the Main Line Chamber of Commerce on the economic outlook, in Philadelphia at 8:30 am ET.

The results of the manufacturing survey of the Institute for Supply Management, which are based on data compiled from purchasing and supply executives nationwide, are due out at 10 am ET. Economists expect the index to show a reading of 54.5 for January.

The manufacturing purchasing managers' index rose to 53.9 in December from 52.7 in November. The index was at the highest level since June. The new orders index rose 1 point to 57.6 and the order backlogs index climbed 3 points to 48, while the production index was up 3.3 points to 59.9. The employment index also increased by 3.3 points to 55.1.

The Commerce Department's construction spending report to be released at 10 am ET is expected to show a 0.5 percent increase in December.

Construction spending increased by 1.2 percent in November, although the previous month's 0.8 percent growth was downwardly revised to a 0.2 percent drop. Private sector construction sending rose 1 percent compared to a steeper 1.7 percent increase in public sector construction spending.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended January 27th at 10:30 AM ET.

Crude oil stockpiles rose by 3.6 million barrels to 334.8 million barrels in the week ended January 20th, remaining in the upper limit of the average range.

Gasoline stockpiles edged down by 0.4 million barrels yet remained in the upper limit of the average range. Distillate inventories declined by 2.5 million barrels and were in the middle of the average range. Refinery capacity utilization averaged 84.1 percent over the four-weeks ended January 20th compared to 84.6 percent over the previous four weeks.


The Labor Department is due to release its customary jobless claims report for the week ended January 28th at 8:30 AM ET. Economists expect claims to have risen to 377,000.
Jobless claims rose 21,000 to 377,000 in the week ended January 21st. However, the four-week average fell to 377,500 from the previous week's revised reading of 380,000. Continuing claims calculated with a week's lag rose 88,000 to 3.554 million.

The U.S. Labor Department is also scheduled to release its preliminary fourth quarter non-farm productivity and unit labor costs at 8:30 AM. Economists expect productivity to have increased by 2.3 percent, while unit labor costs is expected to have declined by 2.5 percent.

Final estimates for the third quarter revealed productivity growth of 2.3 percent, downwardly revised from the 3.1 percent spike in productivity reported earlier. Unit labor costs, initially reported as having fallen 2.4 percent, were revised slightly further down to a decline of 2.5 percent for the third quarter. Most economists had expected the decline in unit labor costs to be revised up slightly to 2.3 percent.

Dallas Federal Reserve Bank President Richard Fisher is scheduled to speak to the Headliners Club of Austin, Texas on the economy and monetary policy at 7:15 pm ET.


The Labor Department is scheduled to release its monthly non-farm payroll report at 8:30 am ET. Economists expect non-farm payrolls for January to increase by 135,000, but they expect the unemployment rate to remain unchanged at 8.5 percent.

The economy added a net 200,000 new jobs for December, with the addition of 212,000 private sector jobs more than offsetting a loss of government jobs. Most economists had forecast a more modest pace of job creation, predicting the private sector would add about 160,000 jobs to produce a net increase of 150,000 positions as government continues to shrink.

The unemployment rate continued to tick downward, falling to 8.5 percent in December, although the November unemployment rate was revised up to 8.7 percent from the 8.6 percent initially reported.

The Commerce Department is due to release its report on factory goods orders for December at 10 am ET. Economists estimate a 1.5 percent increase in orders for factory goods.

Durable goods, which make up the bulk of factory goods showed a better than expected 3 percent increase in December compared to the previous month. Excluding transportation orders, orders were still up 2.1 percent. More importantly, core capital goods orders, which exclude defense aircraft and parts, rebounded by 2.9 percent in December. Shipments of this category of goods, which is directly plugged into GDP calculations, improved 2.6 percent.

In November, factory goods as a whole experienced a 1.8 percent increase in orders. Shipments of this category of goods rose marginally and unfilled orders were up a steeper 1.3 percent.

The Institute for Supply Management is scheduled to release the results of its non-manufacturing survey at 10 am ET. The non-manufacturing index is likely to show a reading of 53.3 for January.

The service sector survey for December showed that the sector continued to expand at a slightly faster rate. The non-manufacturing index rose to 52.67 in December from 52 in November. The business activity index remained flat at 56.2 and the new orders index edged up 0.2 points to 53.2, while the order backlogs index slipped 2.5 points to 45.5. The employment index, though up 0.5 points to 49.4, suggested a contracting job market.

by RTTNews Staff Writer

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