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Economic Update


December 23, 2013


Economic themes: Fed, GDP, Personal Income & Outlays, IMF, Housing.


  • Fed: The Fed formally announced that they will commence tapering their quantitative easing program on January 1st, reducing the bond buying program to $75 billion per month, from $85 billion, with the objective of ending the program entirely by the end of 2014.  They kept the Federal Funds Rate between 0 – 0.25%, adding that it may be necessary to extend the program longer than previously intended if inflation does not pick up.  Low inflation runs the risk of deflation in the event the economy were to slow down.  The Fed sees growth as moderate, employment improving, consumer spending picking up, and their preferred measure of inflation running at 1.1%, below their target of 2%.  Markets viewed the news favorably based on the perception of the economy being strong enough to support itself, and the belief that interest rates will remain low.
  • GDP: Gross domestic product increased by 4.1% in the third quarter, above forecasts of 3.6%, led by personal consumption expenditures.  The GDP price index grew at 2%, inline with the Fed’s objectives.  Demand growth was notably strong, though so was inventory growth, which could drag down fourth quarter figures.
  • PI&O: Personal income increased by 0.2% in November, and wages increased by 0.4%.  Spending increased by 0.5%, the most in 5-months, led by automobile sales.  Inflation posted a 0.1% increase, and is up 1.1% year-over-year.  The consumer sector is gearing up to be a significant contributor to fourth quarter growth.
  • IMF: The International Monetary Fund stated they are going to raise their outlook on the U.S. economy as the tapering announcement, the Federal budget deal, and sustained employment growth help  provides more certainty, though warned any uncertainty regarding the Federal government’s willingness to pay their bills would have harmful impacts.
  • Housing: Existing home sales declined by 4.3% in November, and fell 1.2% year-over-year to a 4.9 million unit pace, largely due to weak inventory, though the slow sales pace increased inventory to 5.1 months.  Prices fell 0.5%, though are up 9.4% year-over-year.  High prices and rising mortgage rates are keeping some buyers at bay, though many of the buyers have been of the cash variety.


Municipal market themes: Puerto Rico, California Water.


  • Puerto Rico: The Padilla administration has proposed three measures to strengthen the commonwealth’s finances, including cancelling the planned sales tax cut, allowing municipalities to sell Puerto Rico Sales Tax Financing (COFINA) bonds, and limit the conditions that the GDB could make loans to public corporations.
  • California Water: Moody’s Investors Service placed $6.6 billion of Aa3 rated California Department of Water Resources bonds on review for a possible upgrade, due to reduced operating risk, supportive cost recovery, and improving credit profile.





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