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Economic Update

February 3, 2014

Economic themes: Manufacturing, GDP, FOMC, Personal Income, Housing.

  • Manufacturing: The ISM factory index posted a 51.3 reading for January, below estimates of 56, with the sharpest decline seen in the new orders component, with other notable declines in production and employment.  Strength was seen in the prices paid component.  With manufacturing representing 12.9% of the economy, the plus-50 reading implies the sector continues to expand, just not as quickly as perceived.
  • GDP: The economy grew at 3.2% in the fourth quarter, above estimates of 3.0%, with strength seen in personal consumption, exports, and state and local government spending.  Weakness was observed in Federal government spending and residential fixed investment.  The GDP price index increased by 1.3%, leaving the Fed with plenty of fuel to stay accommodative.
  • FOMC: The Fed announced they will trim their quantitative easing program by an additional $10 billion in February, to $65 billion per month, and left the Federal Funds Rate unchanged between 0 – 0.25%.  The notable change in their statement was that, “economic activity picked up in recent quarters,” from, “expanding at a moderate pace.”  They expressed continued concern over the lack of inflation.  If economic data proves resilient, we could see further tapering, although the Fed will continue to emphasize employment growth, and stoking inflation.  Janet Yellen took over as Fed Chair on February 1st, and has the unenviable task of dealing with a debt ceiling debate, scheduled for the end of the month.  All eyes will be on Friday’s employment report.
  • Personal Income & Outlays: Personal income was unchanged in December, while personal outlays increased by 0.4%, and headline inflation increased by 1.1%.  The consumer remains resilient in terms of spending, but wages remain stagnant.
  • Housing: Pending home sales fell 8.7% to a 92.4 reading, well below forecasts of a 0.5% decline.  Lack of inventory was the most notable drag on the figure, though higher prices, a soft job market, and current mortgage rates are factored into the equation as well.
  • Economic highlights for the week ahead:
    • Thursday, 2/06/2014: International Trade, Jobless Claims.
    • Friday, 2/07/2014: Employment Report.

Municipal market themes: California Pensions, Puerto Rico.

  • California Pensions: San Jose Mayor Chuck Reed, among other supporters of pension reform, are working on getting the Pension Reform Act of 2014 on the California ballot in November 2014, which would impact state and local governments’ ability to cut future accrual of pension benefits for current employees while protecting already promised benefits.  Chuck Reed wants to ensure state and local governments will be sustainable for the long term, while those opposed to the measure are attempting to protect benefits that are increasing at a far faster rate than most forms of tax revenue.
  • Puerto Rico: The Padilla Administration has stated they will deliver a budget with little to no deficit for fiscal 2015, after running consecutive deficits since 2000, with the fiscal 2014 deficit projected at 7.9% of spending, or $820 million.  This statement comes as the Commonwealth continues to attempt to access the capital markets.  While such a move would be a credit positive, there are many doubters as to how successful the administration will be at delivering such a quick turnaround.

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