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Weekly Economic Commentary 4/29/2013

Weekly Economic Commentary 4/29/2013

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Weekly Economic Commentary 4/29/2013
Weekly Economic Commentary 4/29/2013

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Categories:Types, Business/Law
Published by: monarchadvisorygroup on May 02, 2013
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Member FINRA/SIPCPage 1 o 6
Weekly Economic Commentary
April 29, 2013
GDP = C + I + G + (X-M)
College reshmen know it — or should know it — by the end o theirEconomics 101 classes, but or most o us, reshman year in collegeremains a bit “uzzy” or a variety o reasons. On Friday, April 26, 2013, theBureau o Economic Analysis (BEA) o the U.S. Department o Commercereleased the rst estimate o gross domestic product (GDP) or the rstquarter o 2013. Infation-adjusted, or real, GDP expanded at a 2.5%seasonally adjusted annualized rate in the rst quarter o 2013, ater risingat just 0.4% in the ourth quarter o 2012. The 2.5% increase ell short oexpectations or 3.0% growth. Over the last three quarters (third quartero 2012, ourth quarter o 2012, and rst quarter o 2013), real GDP growthhas averaged 2.0%. We continue to expect GDP growth to average around2.0% over the course o 2013.Although consumer spending, housing, and inventory accumulationaccelerated in Q113 versus Q412 and added to growth, business spendingslowed dramatically, and the trade decit widened, dampening growth.Housing construction added 0.3 percentage points to GDP in the rstquarter, marking the eighth quarter in a row that housing has added to GDP,ater a ve-year period (2006 2010) where housing was a drag on GDP.The big story in the GDP report was again ederal government spending.Deense spending ell 11.5% annualized between Q412 and Q113, ater the22% drop in Q412 versus Q312, the largest back-to-back drop in deensespending in 60 years. The sequester, which cut ederal government spendingacross the board beginning on March 1, 2013, contributed to a 2.0% dropin non-deense ederal spending between Q412 and Q113. State and localgovernment spending ell again, too, by 1.2% between Q413 and Q113, thesecond consecutive quarterly decline, and the 13th quarterly decline in stateand local spending in the past 14 quarters, dating back to the end o 2009. Onbalance, there were ew, i any signs, in the GDP report or the rst quarter o2013 that the economy will re-accelerate anytime soon.
John Canally, CFA
EconomistLPL Financial
The U.S. Department o Commerce’s just-released rst estimate or gross domesticproduct (GDP) or Q113 shows continueddeclines in ederal spending, including deensespending and state and local spending.There were ew, i any signs, in the GDPreport or the rst quarter o 2013 that the U.S.economy will re-accelerate anytime soon.We continue to expect GDP growth to averagearound 2.0% over the course o 2013.We examine the various components and driverso GDP in this publication.
Please see the LPL Financial Research Weekly Calendar on page 3
LPL Financial Member FINRA/SIPC Page 2 o 6
The ABCs of GDP
(Seasonally) adjusted.
GDP is reported by the BEA in severaldierent ways, but the most commonly cited way is on a real(infation-adjusted) seasonally adjusted annualized basis. GDP isseasonally adjusted to smooth out the fuctuation in the economy relatedto weather patterns, shopping patterns, holidays, school vacations, etc., toallow apples-to-apples comparisons between quarters. For example, vehicleassembly plants typically shut down in July, which would depress GDP inthe third quarter (July, August, and September) relative to the second quarter(April, May, and June). Similarly, sales o jewelry spikes around Christmasand again at Valentine’s Day. Seasonally adjusting the data helps marketparticipants to see through the swings in the seasonal data and helps to revealthe true underlying health o the economy at any time o the year.
Business capital spending.
Part o “I,” business capitalspending (capex), is what businesses spend on machinery,sotware, urniture, vehicles, computers, iPads, etc.Businesses spent an annualized $1.2 trillion on equipment andsotware in the rst quarter o 2013, accounting or 8% o GDP.Business capital spending is very sensitive to economic conditions.Business capital spending did not surpass its pre-Great Recessionpeak o $1.1 trillion until mid-2012. Market participants digest plentyo “input” data on business capital spending — Institute or SupplyManagement (ISM), durable goods orders and shipments, theregional Federal Reserve Bank manuacturing indices, reports romcompanies, truck sales, steel production, and rail car loadings — wellahead o the GDP report, but there is more inormation available togauge consumer spending than there is to gauge business spending.
Consumption or consumer spending,
ondurable goods, non-durable goods, and services.Consumption accounts or two-thirds o GDP. Inthe rst quarter o 2013, consumers spent an annualized$9.7 trillion, adjusted or infation. Consumption surpassedits pre-Great Recession peak o $9.3 trillion in early2011. O all the categories o GDP, consumption is themost visible to most consumers. We all spend moneyon various items every day. The data sets that provideinput to the consumption portion o GDP — weekly retailsales, chain store sales, vehicle sales, etc. is bothrobust and abundant. By the time GDP is released, mostmarket participants have a pretty good sense o what thiscomponent o GDP is doing.
Source: Bureau o Economic Analysis, Haver Analytics 04/29/13Shaded areas indicate recession.
‘11‘10‘09‘08‘07‘06‘05‘04‘03‘02‘01‘0099 12‘98 8%4%0%-4%-8%-12%Real Gross Domestic Product: Quantity Index
Seasonally Adjusted Annual Rate, % Change
GDP Growth Has Averaged 2.0% Over the PastThree Quarters
GDP is seasonally adjusted to smoothout the fuctuation in the economyrelated to weather patterns, shoppingpatterns, holidays, school vacations, etc.
LPL Financial Member FINRA/SIPC Page 3 o 6
201329 Apr
Personal Income and Personal Spending (Mar)
Pending Home Sales (Mar)
Dallas Fed Manuacturing Index (Apr)
Italy: Bond Auction
Germany: CPI (Apr)
Spain: Retail Sales (Mar)30 Apr
Employment Cost Index (Q1)
Case-Shiller Home Price Indices (Feb)
Chicago Area Purchasing Managers Index (Apr)
Consumer Conidence (Apr)
China: PMI (Apr)
Germany: Retail Sales (Mar)
Spain: GDP (Q1)
Germany: Unemployment (Mar)
Eurozone: CPI (Apr)
Eurozone: Unemployment (Mar)1 May
ADP Employment Report (Apr)
Construction Spending (Feb)
ISM (Apr)
Vehicle Sales (Apr)
FOMC Decision
2 May
Challenger Job Cut Announcements (Apr)
Trade Balance (Mar)
Productivity (Q1)
Initial Claims (4/27)
Eurozone: European Central Bank Meeting
Eurozone: PMI (Apr)
China: Non Manufacturing PMI (Apr)
France: Bond Auction
Italy: Car Sales (Apr)3 May
Employment Report (Apr)
Factory Orders (Mar)
ISM – Service Sector (Apr)
India: Central Bank Meeting
FedGlobal Notables
LPL Financial Research Weekly Calendar
U.S. Data
Durable goods.
Consumer spending on durable goods (itemsdesigned to last more than three years), including microwaveovens, rerigerators, and color TVs. Consumers spent an annualized$1.4 trillion on durable goods in the rst quarter o 2013. Spending ondurable goods surpassed the pre-Great Recession peak o $1.2 trillion inearly 2011. Consumer spending on durable goods represents 15% o totalconsumer spending, and is the category o consumer spending that is themost sensitive to overall economic conditions.
Hawks: Fed ocials who avor the low infation side o the Fed’s dual mandate o low infation and ull employmentDoves: Fed ocials who avor the ull employment side o the Fed’s dual mandate* Voting members o the Federal Open Market Committee (FOMC)
Government spending
, including spending by theederal government and state and local governments.Governments spent an annualized $2.4 trillion in the rstquarter o 2013, with the ederal government spending just under$1 trillion and state and local governments spending $1.4 trillion.Government spending peaked in 2009 and 2010 at around $2.6
Consumer spending on durablegoods is the most sensitive tooverall economic conditions.

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