Lately there has been a trillion-dollar question on pretty much everyone’s minds: When is the Fed going to scale back its $85 billion a month in bond buying and to what degree? In fact, Wall Street’s curiosity surrounding the Fed has evolved into an obsession as the central bank’s policies has driven more and more investors into the stock market. No one wants to be stuck holding the bag when the Fed announces the end to Quantitative Easing, so many have been frantically reading the tea leaves to figure out when this will happen.
So here’s a little insight from an former analyst for the Fed: It pays to keep tabs on the economy. Chairman Ben Bernanke has all but pledged to keep the money pump on until there is conclusive evidence of robust economic growth.
However, with breaking economic news coming out nearly every day, I understand that it can be a hassle keeping up with each and every report. So every Friday in this blog I hit the past week’s highlights and provide my take on the latest economic trends. Let’s take a look at this week’s big headlines:
#1—Jobless Claims Continue To Hold
Last week, initial claims for unemployment advanced 10,000 to 354,000. Economists had expected initial claims to climb to just 345,000, so this came as somewhat of a surprise. Meanwhile, the prior week’s claims were revised up from its original reading of 340,000 to 344,000. At the same time, the closely-watched four-week average of new claims rose by 6,750 to 347,250. Due to this uptick in new unemployment claims, all eyes will be on next week’s May payroll report. Even so, we are still comfortably under the 400,000 benchmark which demarcates a contracting labor market.
#2—Consumer Confidence Is At A Multi-Year High
In May, the Conference Board’s consumer confidence index rose to a reading of 76.2. This represents a significant gain from what we saw in April—68.1. This is also well above economists’ consensus estimate of 72.3. Behind the jump in consumer confidence was an improving job market and rising consumer expectations for the next several months. Consumer confidence is now at a five-year high according to the Conference Board. This is consistent with the University of Michigan/Reuters’ consumer sentiment index, which is near a seven-year high.
#3—Consumer Spending Propped Up First-Quarter Growth…
In the first quarter, the U.S. economy grew at a revised 2.4% annual pace. This is a slightly slower pace than the advance estimate, which projected 2.5% growth. According to the Commerce Department, economic growth was hindered by a 4.9% decline in government spending. The biggest declines came at the county and city level of government. This is a steeper drop than the 4.1% rate originally estimated. Meanwhile, consumer spending rose at a 3.4% annual rate, helping to somewhat offset the public sector drag. While we would have all liked to have seen stronger growth in the first quarter, these results still represent an uptick from the 0.4% growth we saw in the fourth quarter. It is clear that American consumers are pulling their weight of the economic recovery; this is crucial, given that the austerity measures aren’t likely to end anytime soon.
#4—…But Spending Is Flagging So Far In The Second Quarter
In April, consumer spending slipped 0.2%. This was unexpected as economists had expected spending to climb 0.1% (after rising 0.1% in March). However, when adjusted for inflation, spending did rise 0.1%. This is the first time in nearly a year that consumer spending has fallen. And unfortunately the latest data suggests that consumer spending will slow in the second quarter. Because consumer spending accounts for such a substantial chunk of the economy, I will monitor this indicator closely.
Meanwhile, personal income remained unchanged. This was a stronger turnout than expected—economists had expected income to fall 0.2%.
Have a nice weekend,
P.S.: Next month, P.S. I will be speaking at the San Diego Marriott La Jolla in La Jolla, California, on Wednesday, June 5 at 7 p.m. and then the Irvine Marriott in Irvine, California, on Thursday, June 6 at 7 p.m. You may attend at no cost, but please call 800-454-1395 to register. I will review where investors can achieve the highest yields in both bonds and stocks, as well my current market outlook, favorite stock picks and have an extensive question-and-answer session.