JANUARY 2010

Economic Activity Remained Positive

The Federal Open Market Committee met in late January and maintained the federal funds target rate at 0 to 0.25%.  They anticipate economic conditions will be supportive of growth, but that growth is likely to be moderate for some time.¹  Gross domestic product (GDP) increased at an annualized rate of 5.7% for the fourth quarter according to advanced estimates, which was largely driven by private inventory investment, exports, and personal consumption expenditures.²  This is the second quarter of growth and fastest expansion of GDP in approximately three years.³  Despite the substantive portion of GDP growth attributable to inventory investment, inventories continued to decline. 

The U.S. Census Bureau reported that new orders for manufactured goods increased 1% in December.  While new orders were still approximately 17.6% below prior year levels, new orders showed signs of positive movement, as they increased in eight of the last nine months.⁴  Economic activity within the non-manufacturing sectors also increased in January, as the Non-Manufacturing Index was up 50.5% from 49.8% in December.  Readings over 50% indicate growth; however, those surveyed commented that they remain “cautiously optimistic about business conditions.”⁵

Unemployment Declines

An improving economic environment positively impacted business productivity, which rose again in January.  Nonfarm business sector labor productivity increased at an annualized rate of 6.2% during the fourth quarter.  This gain was comprised of a 7.2% output increase and a 1.0% increase in labor hours worked.  According to the Bureau of Labor Statistics, this data point marks the first quarter where labor hours increased since the second quarter of 2007, a positive sign in the labor market.⁶  The estimated unemployment rate dropped from 10.0% to 9.7% in January.  Unemployment was influenced primarily by new jobs within temporary and retail service companies, although offset in part due to job losses within the construction and transportation sectors.⁷

Consumer Confidence edges Upward

The Index of Consumer Sentiment rose to 74.4 in January, up 21.6% from year-over-year levels, the highest measurement in over two years.⁸  As unemployment slowly declined, personal income (+0.4%) and real disposable personal income (+0.3%) both increased slightly from November to December.⁹  Real personal consumer spending, however, only increased 2.0% in the fourth quarter, down from 2.8% in the third quarter, although the decline was influenced by a post “cash for clunkers” hangover.¹⁰  Personal savings was essentially flat at 4.6% during the fourth quarter, from 4.5% in the third quarter.¹¹  Consumer credit continued to contract, but fell at a slower pace, with a 0.8% decline in December.  While this figure improved significantly from -10.6% in November, consumer credit declined 4.0% in 2009 compared an increase of 1.6% in 2008.¹²  The weak labor market is expected to remain a headwind to consumer spending, as consumers will likely delay large purchases as they continue to be burdened by debt and weak investment portfolios, which present threats to their future financial security.

¹ Federal Reserve.  Information available from http://www.federalreserve.gov.  27 January 2010.

² Bureau of Economic Analysis.  “Gross Domestic Product:  Fourth Quarter 2009 (Advance Estimate).  Information available from http://www.bea.gov.  29 January 2009.  

³ The Wall Street Journal Online.  “The Inventory Recovery.”  Information accessed on http://www.wsj.com.  30 January 2010.

⁴ U.S. Department of Commerce.  “Full Report on Manufacturers’ Shipments, Inventories and Orders – December 2009.”  4 February 2010.

⁵ The Wall Street Journal Online.  “January 2010 Non-Manufacturing ISM Report on Business.”  Information accessed on http://www.wsj.com.  3 February 2010.

⁶ Bureau of Labor Statistics.  “Productivity and Costs.”  Information available from http://www.bls.gov.  4 February 2010.

⁷ Bureau of Labor Statistics.  “The Employment Situation – January 2010.”  Information available from http://www.bls.gov.  5 February 2010.

⁸ Curtin, Richard.  “Consumer Confidence Slowly Improves.”  Information available from http://www.reuters.com/universitymichigan.  29 January 2009.

⁹ U.S. Department of Commerce.  “Personal Income and Outlays:  December 2009.”  Information available from http://www.bea.gov.  2 February 2010.

^10-11 Bureau of Economic Analysis.  “Gross Domestic Product:  Fourth Quarter 2009 (Advance Estimate).  Information available from http://www.bea.gov.  29 January 2009.  

¹² Federal Reserve.  “Consumer Credit – December 2009.”  Information available from http://www.federalreserve.gov.  5 February 2010.