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THE NATIONAL ECONOMIC REVIEW
Fourth Quarter 2012
GENERAL ECONOMIC OVERVIEW
Gross Domestic Product
According to advance estimates released by the Department of Commerce’s Bureau of Economic Analysis,
Real Gross Domestic Product (“GDP”), the output of goods and services produced by labor and property
located in the United States, decreased at an annualized rate of 0.1% during the fourth quarter of 2012. This
represents the first decline in annualized quarterly GDP since the second quarter of 2009, and follows a
growth rate of 3.1% during the third quarter of 2012. GDP grew 2.2% for all of 2012, versus growth of 2.4%
in 2010 and 1.8% in 2011. The decline in real GDP during the fourth quarter is attributable to private
inventory investment, federal government spending, and exports. These factors were partially offset by
positive contributions from personal consumption expenditures, nonresidential fixed investment, and
residential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased.
The decline in GDP during the fourth quarter of 2012 was not expected, as economists polled in the weeks
prior to the release projected GDP growth. However, the main drivers of the decline in GDP included the
change in real private inventories, which lowered GDP growth by 1.27 percentage points, and the decline in
government spending, which lowered GDP by 1.33 percentage points. The 0.1% decline in GDP during the
fourth quarter of 2012 compares to growth of 1.3% and 3.1% in the second and third quarters, respectively.
Despite the slight decline in GDP in the fourth quarter, recent measures remain considerably better than the
declines in GDP observed in the third and fourth quarters of 2008 and the first two quarters of 2009, which
marked the first time since 1975 that the U.S. economy contracted for more than two consecutive quarters.
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THE NATIONAL ECONOMIC REVIEW
Fourth Quarter 2012
Economic Indicators
The Conference Board (“TCB”) reported that the Composite Index of Leading Economic Indicators (“LEI”),
the government’s primary forecasting gauge, increased 0.5% in December 2012 to 93.9 after a 0.3% increase
in October and no change in November. The components and calculation of the LEI were revised in
December 2011 and benchmark revisions were made in December 2012. Traditionally, the index is thought
to gauge economic activity six to nine months in advance. Multiple consecutive moves in the same direction
are said to be indicative of the general direction of the economy.
According to Ken Goldstein, an economist at The Conference Board, “The latest data suggest that a pickup in
domestic growth is now more likely, compared to a few months ago. Housing, which has long been a drag,
has turned into a positive for growth, and will help improve consumer balance sheets and strengthen
consumption. However, for growth to gain more traction we also need to see better performance on new
orders and an acceleration in capital spending.”
Five of the LEI’s ten leading economic indicators rose during December 2012. The positive contributors to
the LEI (largest to smallest) included weekly initial unemployment insurance claims (inverted), interest rate
spread, the Leading Credit Index™ (inverted), stock prices, and building permits. Consumer expectations,
the ISM® new orders index, and manufacturers’ new orders for nondefense capital goods declined during
December. Average weekly manufacturing hours and manufacturers’ new orders for consumer goods and
materials were unchanged. During the six-month span through December 2012, the LEI increased by 1.3%,
higher than the 0.5% growth recorded during the first half of the year. In December, the Coincident Index
increased 0.2% and the Lagging Index increased 0.7%.
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THE NATIONAL ECONOMIC REVIEW
Fourth Quarter 2012
Business Cycle and Fiscal Situation
The economy deteriorated considerably during the second half of 2008 and continued to display declining
performance during the first half of 2009 as crisis engulfed the financial sector, causing significant damage
to financial institutions on a global scale. As a result of the crisis, lending activities and market liquidity
became constrained, intensifying a downward spiral in the broader economy as businesses struggled to
obtain the capital necessary for operations and investment while consumers controlled spending in response
to high unemployment and unfavorable conditions in the housing market.
In late November 2008, the Business Cycle Dating Committee of the National Bureau of Economic Research
(“NBER”) determined that economic activity in the U.S. had peaked in December of 2007 and that the
economy had then entered a state of contraction. In September 2010, the NBER determined that the
contraction that began in December 2007 had ended in June 2009. The following table provides perspective
concerning NBER business cycles from the Great Depression to the present. The most recent contraction
represented the longest of 13 contractions subsequent to the Great Depression.
NBER Business Cycle Reference Dates (1929 - Present)
Month & Year of Economic
Peak
Trough
August 1929
May 1937
February 1945
November 1948
July 1953
August 1957
April 1960
December 1969
November 1973
January 1980
July 1981
July 1990
March 2001
December 2007
March 1933
June 1938
October 1945
October 1949
May 1954
April 1958
February 1961
November 1970
March 1975
July 1980
November 1982
March 1991
November 2001
June 2009
Duration in Months of
Contraction
Prior Expansion
43
13
8
11
10
8
10
11
16
6
16
8
8
18
21
50
80
37
45
39
24
106
36
58
12
92
120
73
On August 2, 2011 (the same day the U.S. Treasury Department expected the U.S. to reach its
congressionally mandated debt ceiling), President Obama signed the Budget Control Act of 2011 (the “BCA”),
ending the debt crisis in the near-term. The BCA immediately increased the debt ceiling by $400 billion,
with additional increases contingent upon congressional disapproval (i.e., Congress must vote to deny the
ceiling increase requests), and created the Joint Select Committee on Deficit Reduction (commonly referred
to as the “Supercommittee”) tasked with recommending policies to reduce the budget deficit by at least
$1.2 trillion over the next ten years.
In the event that a consensus could not be reached by the
Supercommittee, the BCA called for automatic spending cuts (the “sequester”) starting in 2013.
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THE NATIONAL ECONOMIC REVIEW
Fourth Quarter 2012
Although a default was averted, on August 5, 2011, Standard & Poor’s lowered the U.S. long-term credit
rating from AAA to AA+. The other major credit rating agencies, Moody’s and Fitch, maintained U.S.
long-term credit ratings of Aaa and AAA, respectively (both the highest possible credit ratings). However,
Moody’s stated that if budget negotiations ongoing at year-end 2012 did not lead to specific policies resulting
in the stabilization and subsequent decline in the ratio of federal debt to GDP, the U.S. credit rating could be
downgraded.
As of year-end 2012, the United States was approaching what many called the “fiscal cliff,” a combination of
tax increases and government spending cuts set to go into effect in January 2013. On December 31, 2012,
Senate leaders and the White House had agreed on tentative legislation intended to avert the crisis, as
described in the following table. However, the legislation had not been passed by Congress prior to the end
of 2012.
Fiscal Cliff Issue
Proposed Resolution
Expiration of the Bush-era tax cuts
Existing rates become permanent for individuals earning less
than $400,000 and couples earning less than $450,000. The
marginal tax rate for earned income above these thresholds
increases to 39.6%.
Expiration of the two percentage point
reduction in the payroll tax for Social Security
The payroll tax will increase as planned.
Expiration of emergency unemployment
benefits
Unemployment benefits are extended.
Reductions in Medicare payments to doctors
Medicare payment cuts are pushed back for one year.
A shift in the alternative minimum tax threshold,
increasing the tax burden of middle-income
Americans
The alternative minimum tax threshold is permanently indexed
to inflation, ending the need for annual “patches.”
The sequester
Government spending cuts are delayed for two months.
Introduction of new taxes for high-income
taxpayers mandated by the recent healthcare
reform laws
The 3.8% Medicare tax on unearned net investment income for
individuals and couples with modified adjusted gross incomes
over $200,000 and $250,000, respectively, is still scheduled to
come into effect.
Additionally, the U.S. Treasury Secretary Timothy Geithner announced that United States reached its
statutory debt limit on December 31, 2012. Extraordinary measures taken by the Treasury Department
should allow the federal government to continue to operate for approximately two months before additional
actions must be taken.
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THE NATIONAL ECONOMIC REVIEW
Fourth Quarter 2012
After a successful restructuring of Greek sovereign debt in the first quarter of 2012 eased worries over the
European sovereign debt crisis, adverse developments during the second quarter intensified concerns. The
political party Coalition of the Radical Left (commonly referred to as “Syriza”) garnered the second greatest
number of votes in Greece’s May 6th legislative election. Syriza’s platform included scaling back austerity
measures required under the terms of Greece’s bailout package and potentially ceasing the country’s debt
service payments, increasing fears of a Greek exit from the Eurozone. On the same day, Socialist Party
candidate François Hollande was elected President of France on a platform promoting growth as the answer
to the region’s economic problems, not additional austerity measures. Talks to form a Greek coalition
government failed, so a subsequent election was held on June 17th. “Pro-bailout” political parties earned
enough votes to successfully form a new coalition government, allaying immediate fears of a Greek departure
from the Eurozone.
A summit of European leaders held at the end of June 2012 resulted in agreements related to bank bailout
funds, a single Eurozone banking supervisory body, and measures designed to promote growth. Leaders
agreed to allow for the direct infusion of funds into struggling banks, rather than adding to the sovereign
debt of countries. To help ensure more consistent regulation, the European Central Bank (“ECB”) will
establish a bank supervisory body to oversee all Eurozone banks. Authorities hope this will also help
decouple banks from their home governments. Finally, leaders agreed to a €120 billion package designed to
stimulate growth, including funds for the European Investment Bank to invest in business projects. In
September, ECB President Mario Draghi announced a plan for unlimited purchases of short-term bonds of
struggling Eurozone countries (called Outright Monetary Transactions), designed to restore stability to
sovereign debt markets and lower government borrowing costs.
CONSUMER SPENDING AND INFLATION
According to the Bureau of Labor Statistics, the Consumer Price Index (“CPI”) remained flat in
December 2012, on a seasonally adjusted basis. The unadjusted CPI stood at 229.6 (CPI-U all urban
consumers, 1982-1984 = 100). Energy prices fell 1.2% in December, representing the third consecutive
month of decline, but this was offset by the increased costs of food and shelter. Core CPI, which excludes
food and energy prices, increased 0.1% in December. The seasonally adjusted annual rate (“SAAR”) of
inflation for the fourth quarter was negative 0.7%, compared with negative 0.8% in the second quarter
positive 5.0% during the third quarter. Core inflation was 1.6% (SAAR) in the fourth quarter, following rates
of 2.6% and 1.2% in the second and third quarters, respectively. During 2012, the CPI increased 1.7% after a
3.0% rise in 2011.
The Producer Price Index (“PPI”), which is generally recognized as predictive of near-term consumer
inflation, declined 0.2% in December (PPI for finished goods, seasonally adjusted), after decreases of 0.2%
and 0.8% in October and November, respectively. The December decline was driven by lower gasoline and
food prices. Core PPI for finished goods (excluding food and energy) increased 0.1% for the second month in
a row. In October, core PPI declined 0.2%. On an unadjusted basis, the 12-month change in PPI was 1.3%,
compared to a 4.7% increase in 2011.
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Fourth Quarter 2012
According to the Census Bureau of the U.S. Department of Commerce, the advance estimate of U.S. retail
and food service sales (adjusted for seasonal, holiday, and trading-day differences) for December 2012 was
up 0.5% from the previous month and 4.7% above December 2011. Most store types reported a seasonally
adjusted monthly increase in retail sales, with only electronics and appliance stores and gasoline stations
posting declines. For all of 2012, all store types except department stores and electronics & appliance stores
reported retail sales increases relative to 2011.
Personal consumption spending represents approximately two-thirds of total economic activity and is a
primary component of overall economic growth. Real personal consumption spending increased 2.2% in the
fourth quarter of 2012, compared to increases of 1.5% in the second quarter and 1.6% in the third quarter.
Personal consumption spending increased 1.9% in 2012, compared to increases of 1.8% and 2.5% in 2010
and 2011, respectively. According to the Bureau of Economic Analysis, durable goods purchases increased
13.9% in the fourth quarter, following a decrease of 0.2% in the second quarter and an increase of 8.9% in
the third quarter.
BUSINESS AND MANUFACTURING PRODUCTIVITY
According to the Bureau of Labor Statistics, seasonally adjusted nonfarm business productivity, as measured
by the hourly output of all persons, decreased at an annual rate of 2.0% in the fourth quarter of 2012. The
decline was more severe than economists expected (a decrease of approximately 1.3%), and follows a revised
3.2% increase during the third quarter. Real hourly compensation increased 0.3% during the fourth quarter.
The decline in productivity during the fourth quarter reflected the net effect of a 0.1% increase in output and
a 2.2% increase in hours worked. Annual average productivity increased 1.0% for all of 2012, compared to
an increase of 0.7% in 2011. The fourth quarter productivity figures imply a minimal rate of growth, as
output increased only 0.1%, compared to a 4.7% increase during the third quarter.
Productivity declined 1.9% for the business sector in the fourth quarter of 2012. This was the result of a 1.9%
increase in hours work coupled with no increase in output. Manufacturing productivity, generally more
volatile in its quarterly measures, increased 0.5% during the quarter as output rose 0.7% and hours
increased 0.1%.
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THE NATIONAL ECONOMIC REVIEW
Fourth Quarter 2012
INDUSTRIAL PRODUCTION AND CAPACITY UTILIZATION
According to the Federal Reserve, seasonally adjusted industrial production rose 0.3% in December 2012,
after a 0.3% decline in October and an increase of 1.0% in November (all figures recently revised).
November’s production gains were primarily driven by a rebound in activity after Hurricane Sandy in late
October. Fourth quarter production increased at an annual rate of 1.0%. Production is now at its highest
level since June 2008. Manufacturing output increased 0.8% in December, following a 0.9% decline in
October and a 1.3% increase in November. In the fourth quarter, manufacturing output increased 0.2%,
following an increase of 0.8% in the second quarter and a 1.0% decline in the third quarter.
Seasonally adjusted capacity utilization was 78.8% in December 2012, slightly higher than November’s level
of 78.7% and October’s level of 78.0%. Additionally, December 2012’s capacity utilization was higher than
December 2011’s level of 78.3%. Capacity utilization for the fourth quarter measured 78.5%. During the
second and third quarters, capacity utilization measured 78.9% and 78.6%, respectively. Capacity utilization
remains below the historical average of approximately 80% dating back to the early 1970s, but above levels
seen at the height of the financial crisis. High rates of capacity utilization (generally above 80%) can be a
predictor of higher inflation as incremental output becomes more difficult to achieve without higher wages
and capital investment. The current measure of capacity utilization suggests that business investment for
infrastructure will not likely be a significant component of economic improvement in the near-term.
THE FINANCIAL MARKETS
Broad market equity indices declined in the fourth quarter of 2012, driven by economic uncertainty related
to fiscal cliff negotiations. Yields on U.S. Treasury securities at the end of the fourth quarter were largely
unchanged relative to levels observed at the end of the third quarter.
»
The Dow Jones Industrial Average closed the fourth quarter of 2012 at 13104.14, down 2.5% for
the quarter, following a loss of 2.5% in the second quarter and a 4.3% gain in the third quarter.
The Dow was up 7.3% for all of 2012.
»
The S&P 500 Index declined 1.0% during the fourth quarter to close at 1426.19, following a
decrease of 3.3% in the second quarter and 5.8% increase in the third quarter. The S&P 500
was up 13.4% in 2012.
»
The NASDAQ Composite Index fell 3.1% during the fourth quarter to close at 3019.51,
following a 5.1% decrease and a 6.2% increase in the second and third quarters, respectively.
For all of 2012 the NASDAQ was up 15.9%.
»
The broad market Wilshire 5000 Index closed at 14995.11, down 0.3% for the quarter. It was
up 13.7% for all of 2012.
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THE NATIONAL ECONOMIC REVIEW
Fourth Quarter 2012
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Fourth Quarter 2012
The stock market decline of 2008 was the worst since the Great Depression, while the 2009 market increase
represented the most favorable year since 2003. Going forward, equity markets face considerable hurdles
from the sovereign debt crisis in Europe, slowing economic growth in China, and uncertainty regarding U.S.
economic policy due to the fiscal cliff, which had not been fully resolved by year-end 2012.
Standard & Poor’s downgrade of U.S. debt had the somewhat ironic effect of causing a rally in Treasuries as
investors fled to quality, pushing down yields. The yield on ten-year Treasury securities set a historic low in
2011, before falling even further in 2012.
The monthly average yields-to-maturity on the 20-year Treasury bond during the fourth quarter of 2012
were 2.51%, 2.39%, and 2.47%, respectively, for October, November, and December. After decreasing during
2008, long-term rates generally rose during 2009 before falling again in 2010. Yields continued to fall
during 2011. Yields rose in the first quarter of 2012 after Greece’s successful restructuring of its sovereign
debt eased investor concerns and increased appetite for risk. However, adverse developments during the
second quarter and beginning of the third led to a flight to safety, driving yields lower. Yields increased
during the latter part of the third quarter, due in part to a plan announced by the ECB to buy short-term
sovereign debt of struggling European nations, thereby making U.S. Treasuries a less attractive safe-haven
asset. Yields were relatively flat in the fourth quarter. Bond prices are negatively correlated with their
respective yields, which can shift abruptly due to investor reactions to major variances in reported economic
data versus market expectations (i.e., expected inflation, growth, monetary policy and other Fed action, etc.).
Economists surveyed by The Wall Street Journal anticipate yields to rise over the next several years.
HOUSING STARTS AND BUILDING PERMITS
Home building activity has traditionally been a primary driver of overall economic activity because new
home construction stimulates a broad range of industrial, commercial, and consumer spending and
investment. According to the U.S. Commerce Department’s Bureau of the Census, new privately owned
housing starts were at a seasonally adjusted annualized rate of 954,000 units in December 2012, 12.1%
above the revised November estimate and 36.9% above the December 2011 level. This represented the
highest level of housing starts since June 2008 (the last time housing starts exceeded 1.0 million).
Single-family housing starts were 616,000 in December, 8.1% above the revised November estimate. An
estimated 780,000 privately owned housing units were started in 2012, 28.1% above the 2011 figure of
608,800.
The seasonally adjusted annual rate of private housing units authorized by building permits (considered the
best indicator of future housing starts) was 903,000 units in December 2012, 0.3% above the revised
November rate of 900,000 units and 28.8% higher than the December 2011 level.
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THE NATIONAL ECONOMIC REVIEW
Fourth Quarter 2012
The housing market remains significantly below its highs in 2005 and 2006. As mortgage rates rose,
underlying demand and speculative investment fell and home sales declined.
Housing activity began
declining in early 2006, and during 2007 the situation worsened as a crisis in the sub-prime mortgage
industry spread to the overall mortgage industry.
The December 2012 data point to a stronger housing market, with housing permits, housing starts, houses
under construction, and housing completions all showing increases for the month. Favorable mortgage rates
are also providing tailwinds to the market. While the data suggest a recovery in the housing market is taking
hold, improvement is expected to be constrained in the near term given high levels of inventories and
persistent high unemployment. However, housing vacancies are declining. A continued recovery of the
residential construction industry will require improvement in both employment and income measures and
will take time as current inventories must decline before demand inspires a significant level of new housing
starts.
UNEMPLOYMENT AND PAYROLL JOBS
According to the Labor Department’s Bureau of Labor Statistics (“BLS”), the unemployment rate was 7.8%
in December 2012, unchanged from November.
The October rate was slightly higher at 7.9%.
Unemployment rates increased steadily throughout 2008 and into 2009, peaking at a level of 10.0% in
October 2009. The October 2009 unemployment rate represented the highest level since 1983. While the
unemployment rate is lower than the level observed at year-end 2011, the labor force participation rate is
also lower, as some individuals stopped seeking employment. As job availability increases the labor force
will likely increase due to individuals re-entering the workforce. The increase in the labor force numbers
could lead to an increase in the unemployment rate in the short-term. The labor force participation rate for
December was 63.6%, compared to rates of 63.8% and 63.6% in October and November, respectively.
Economists surveyed by The Wall Street Journal anticipate an unemployment rate of 7.4% at year-end 2013,
and a continued decline to 7.0% by year-end 2014.
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Fourth Quarter 2012
The number of nonfarm payroll jobs increased by 155,000 in December 2012. This follows increases of
137,000 and 161,000 jobs in October and November, respectively. In 2008 a total of 3.6 million nonfarm
payroll jobs were lost, with an additional 5.1 million nonfarm payroll jobs lost during 2009. In 2010, 2011,
and 2012 nonfarm payrolls increased by 1.0 million, 2.1 million, and 2.2 million, respectively. Economists
surveyed by The Wall Street Journal anticipate payroll gains of approximately 159,000 a month over the
next year.
Population growth currently adds approximately 100,000 individuals to the workforce per
month.
INTEREST RATES
The Federal Reserve’s Open Market Committee (“FOMC”) lowered its target for the federal funds rate to a
range of 0% to 0.25% during the fourth quarter of 2008, representing a total rate cut of 175 to 200 basis
points during the quarter. Target rates were held steady during 2009 and have remained unchanged
through the fourth quarter of 2012. In September 2012, the FOMC announced that rates would likely stay
low until mid-2015.
In December, the mid-2015 language was replaced with more explicit language
regarding unemployment and inflationary thresholds which must be met before any tightening of monetary
policy occurs. The FOMC stated that the target range for the federal funds rate would remain at low levels
while the unemployment rate remains above 6.5%, near-term inflation expectations do not exceed the Fed’s
2% long-run goal by more than 0.5 percentage points, and longer-term inflation expectations continue to be
well-anchored.
Information received by the FOMC indicated that the economic recovery is continuing at a moderate pace,
although there were weather-related disruptions. Household spending and the housing sector have shown
improvement. However, there are concerns that, without policy accommodation, economic growth may not
be sufficient to improve labor market conditions to more normalized levels. Strains in global financial
markets continue to be a concern, and growth in business fixed investment has slowed. The FOMC expects
the moderate economic growth to continue in the near-term, with accelerated growth expected in 2014 to
2015. Inflation has been subdued in recent quarters and long-term inflation expectations have remained
stable.
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THE NATIONAL ECONOMIC REVIEW
Fourth Quarter 2012
The Federal Reserve has undertaken several accommodative monetary policy actions in an effort to spur
economic recovery. In September 2011, the Fed announced a plan (widely referred to as “Operation Twist”)
to increase the average maturity of its securities by selling short-term maturities and using the proceeds to
purchase longer dated securities. The intention is to spur investment and aid the housing market by
lowering benchmark interest rates without increasing the size of the Fed’s balance sheet. Originally slated to
end on June 30, 2012, the program was extended through the end of 2012. Operation Twist will be replaced
by a program of longer-term Treasury security purchases initially set for $45 billion per month.
In
September 2012, the Fed announced plans to purchase approximately $40 billion in agency mortgagebacked securities per month (commonly called “QE3”) in a continued effort to lower long-term interest rates
and stimulate the economy.
The following was excerpted from the Federal Reserve’s December 12th press release:
Information received since the Federal Open Market Committee met in October suggests that
economic activity and employment have continued to expand at a moderate pace in recent
months, apart from weather-related disruptions. Although the unemployment rate has
declined somewhat since the summer, it remains elevated. Household spending has continued
to advance, and the housing sector has shown further signs of improvement, but growth in
business fixed investment has slowed. Inflation has been running somewhat below the
Committee’s longer-run objective, apart from temporary variations that largely reflect
fluctuations in energy prices. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment
and price stability. The Committee remains concerned that, without sufficient policy
accommodation, economic growth might not be strong enough to generate sustained
improvement in labor market conditions. Furthermore, strains in global financial markets
continue to pose significant downside risks to the economic outlook. The Committee also
anticipates that inflation over the medium term likely will run at or below its 2 percent
objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the
rate most consistent with its dual mandate, the Committee will continue purchasing
additional agency mortgage-backed securities at a pace of $40 billion per month. The
Committee also will purchase longer-term Treasury securities after its program to extend the
average maturity of its holdings of Treasury securities is completed at the end of the year,
initially at a pace of $45 billion per month. The Committee is maintaining its existing policy
of reinvesting principal payments from its holdings of agency debt and agency mortgagebacked securities in agency mortgage-backed securities and, in January, will resume rolling
over maturing Treasury securities at auction. Taken together, these actions should maintain
downward pressure on longer-term interest rates, support mortgage markets, and help to
make broader financial conditions more accommodative.
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THE NATIONAL ECONOMIC REVIEW
Fourth Quarter 2012
The Committee will closely monitor incoming information on economic and financial
developments in coming months. If the outlook for the labor market does not improve
substantially, the Committee will continue its purchases of Treasury and agency mortgagebacked securities, and employ its other policy tools as appropriate, until such improvement is
achieved in a context of price stability. In determining the size, pace, and composition of its
asset purchases, the Committee will, as always, take appropriate account of the likely efficacy
and costs of such purchases.
To support continued progress toward maximum employment and price stability, the
Committee expects that a highly accommodative stance of monetary policy will remain
appropriate for a considerable time after the asset purchase program ends and the economic
recovery strengthens. In particular, the Committee decided to keep the target range for the
federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low
range for the federal funds rate will be appropriate at least as long as the unemployment rate
remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no
more than a half percentage point above the Committee’s 2 percent longer-run goal, and
longer-term inflation expectations continue to be well anchored. The Committee views these
thresholds as consistent with its earlier date-based guidance. In determining how long to
maintain a highly accommodative stance of monetary policy, the Committee will also
consider other information, including additional measures of labor market conditions,
indicators of inflation pressures and inflation expectations, and readings on financial
developments. When the Committee decides to begin to remove policy accommodation, it will
take a balanced approach consistent with its longer-run goals of maximum employment and
inflation of 2 percent.
SUMMARY AND OUTLOOK
While the aptly named Great Recession reached its official end in mid-2009, economic growth remains
subdued and the recovery is viewed as fragile. The pace of recovery is likely to remain moderate but positive,
though strains in global financial markets could be disruptive. The sovereign debt crisis in Europe continues
to weigh on investor sentiment despite coordinated action by the ECB. Hiring is taking place, though
unemployment remains elevated. Activity in the housing market, while strengthening, remains well below
pre-recession levels. The outlook is not expected to significantly improve until inventories of unsold new
homes decline and the backlog of bank-owned and foreclosed properties clears the market. GDP growth
expectations from private economists surveyed by The Wall Street Journal are on the order of 1.7% for the
first quarter of 2013 and 2.3% for all of 2013. This compares to GDP growth of 2.4%, 1.8%, and 2.2% in
2010, 2011, and 2012, respectively.
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THE NATIONAL ECONOMIC REVIEW
Fourth Quarter 2012
The Federal Reserve’s outlook concurs with that of many private economists by suggesting that GDP growth
is expected to continue but will likely remain constrained in the near-term due to slowing growth of foreign
economies, decreased government spending, weak labor and housing markets, continued consumer
deleveraging, and high levels of uncertainty among households and businesses. On average, economists
surveyed by The Wall Street Journal expect unemployment to decline to 7.6% by mid-2013 and then
continue downward to 7.4% by year-end 2013. Given the FOMC’s statements, it is unlikely there will be any
tightening of monetary policy until unemployment declines or inflation increases. Governmental response
to the financial and economic crisis has been significant. However, the existence and efficacy of future
stimulus is uncertain given the low interest rate environment (hampering the impact of accommodative
monetary policy) and political pushback against increased government spending in light of current deficit
spending and the record level of U.S. government debt. Further improvements in the labor and housing
markets will be necessary to support sustained growth going forward.
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Fourth Quarter 2012
Special Notes:
The following page can be combined with the General Economic Overview section beginning on page 1 of
The NER to develop a condensed version for use in shorter and/or more limited engagements.
Financial data presented in the quarterly and annual spreadsheets can be omitted or used selectively when using the
abbreviated format, as most vital statistics are referenced in the text.
This area intentionally left blank.
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Fourth Quarter 2012
CONSUMER SPENDING AND INFLATION
The unadjusted CPI remained flat at 229.6 in December 2012. Energy prices fell 1.2%, but this was offset by
the increased costs of food and shelter. Core CPI increased 0.1%. The seasonally adjusted annual rate of
inflation for the fourth quarter was negative 0.7%. Core inflation was 1.6% in the fourth quarter. During
2012, the CPI increased 1.7% after a 3.0% rise in 2011.
The Producer Price Index declined 0.2% in
December. The December decline was driven by lower gasoline and food prices. Core PPI for finished goods
increased 0.1% for the second month in a row. The 12-month change in PPI was 1.3%.
The advance estimate of U.S. retail and food service sales for December 2012 was up 0.5% from the previous
month and 4.7% above December 2011. Real personal consumption spending increased 2.2% in the fourth
quarter of 2012. Personal consumption spending increased 1.9% in 2012, compared to an increase of 2.5% in
2011. Durable goods purchases increased 13.9% in the fourth quarter, following an increase of 8.9% in the
third quarter.
BUSINESS AND MANUFACTURING PRODUCTIVITY
Nonfarm business productivity decreased 2.0% in the fourth quarter of 2012. The decline was more severe
than economists expected (a decrease of approximately 1.3%), and follows a revised 3.2% increase during the
third quarter. Annual average productivity increased 1.0% for all of 2012, compared to an increase of 0.7%
in 2011. Productivity declined 1.9% for the business sector in the fourth quarter of 2012. Manufacturing
productivity increased 0.5% during the quarter.
INDUSTRIAL PRODUCTION AND CAPACITY UTILIZATION
Seasonally adjusted industrial production rose 0.3% in December 2012 after a 1.0% increase in November.
November’s production gains were primarily driven by a rebound in activity after Hurricane Sandy in late
October. Production is now at its highest level since June 2008. In the fourth quarter, manufacturing
output increased 0.2%, following a 1.0% decline in the third quarter.
Capacity utilization was 78.8% in December 2012, slightly higher than November’s level of 78.7% and
October’s level of 78.0%. Capacity utilization for the fourth quarter measured 78.5%. The current measure
of capacity utilization suggests that business investment for infrastructure will not likely be a significant
component of economic improvement in the near-term.
THE FINANCIAL MARKETS
Broad market equity indices declined in the fourth quarter of 2012, driven by economic uncertainty related
to fiscal cliff negotiations. Yields on U.S. Treasury securities at the end of the fourth quarter were largely
unchanged relative to levels observed at the end of the third quarter.
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Fourth Quarter 2012
»
The Dow Jones Industrial Average closed the fourth quarter of 2012 at 13104.14, down 2.5% for
the quarter, following a loss of 2.5% in the second quarter and a 4.3% gain in the third quarter.
The Dow was up 7.3% for all of 2012.
»
The S&P 500 Index declined 1.0% during the fourth quarter to close at 1426.19, following a
decrease of 3.3% in the second quarter and 5.8% increase in the third quarter. The S&P 500
was up 13.4% in 2012.
»
The NASDAQ Composite Index fell 3.1% during the fourth quarter to close at 3019.51,
following a 5.1% decrease and a 6.2% increase in the second and third quarters, respectively.
For all of 2012 the NASDAQ was up 15.9%.
»
The broad market Wilshire 5000 Index closed at 14995.11, down 0.3% for the quarter. It was
up 13.7% for all of 2012.
The monthly average yields-to-maturity on the 20-year Treasury bond during the fourth quarter of 2012
were 2.51%, 2.39%, and 2.47%, respectively, for October, November, and December. Economists surveyed
by The Wall Street Journal anticipate yields to rise over the next several years.
HOUSING STARTS AND BUILDING PERMITS
New privately owned housing starts were at a seasonally adjusted annualized rate of 954,000 units in
December 2012, 12.1% above the revised November estimate and 36.9% above the December 2011 level. An
estimated 780,000 privately owned housing units were started in 2012, 28.1% above the 2011 figure of
608,800. The seasonally adjusted annual rate of private housing units authorized by building permits was
903,000 units in December 2012, 0.3% above the revised November rate of 900,000 units and 28.8% higher
than the December 2011 level.
The December 2012 data point to a stronger housing market, with housing permits, housing starts, houses
under construction, and housing completions all showing increases for the month. Favorable mortgage rates
are also providing tailwinds to the market. A continued recovery of the residential construction industry will
require improvement in both employment and income measures and will take time as current inventories
must decline before demand inspires a significant level of new housing starts.
UNEMPLOYMENT AND PAYROLL JOBS
The unemployment rate was 7.8% in December 2012, unchanged from November.
The labor force
participation rate for December was 63.6%, compared to rates of 63.8% and 63.6% in October and
November, respectively. Economists surveyed by The Wall Street Journal anticipate an unemployment rate
of 7.4% at year-end 2013, and a continued decline to 7.0% by year-end 2014.
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THE NATIONAL ECONOMIC REVIEW
Fourth Quarter 2012
The number of nonfarm payroll jobs increased by 155,000 in December 2012. Economists surveyed by The
Wall Street Journal anticipate payroll gains of approximately 159,000 a month over the next year.
Population growth currently adds approximately 100,000 individuals to the workforce per month.
INTEREST RATES
In September 2012, the FOMC announced that rates would likely stay low until mid-2015. In December, the
mid-2015 language was replaced with more explicit language regarding unemployment and inflationary
thresholds which must be met before any tightening of monetary policy occurs. In September 2012, the Fed
announced plans to purchase approximately $40 billion in agency mortgage-backed securities per month
(commonly called “QE3”) in a continued effort to lower long-term interest rates and stimulate the economy.
SUMMARY AND OUTLOOK
While the aptly named Great Recession reached its official end in mid-2009, economic growth remains
subdued and the recovery is viewed as fragile. The pace of recovery is likely to remain moderate but positive,
though strains in global financial markets could be disruptive. The sovereign debt crisis in Europe continues
to weigh on investor sentiment despite coordinated action by the ECB. Hiring is taking place, though
unemployment remains elevated. Activity in the housing market, while strengthening, remains well below
pre-recession levels. The outlook is not expected to significantly improve until inventories of unsold new
homes decline and the backlog of bank-owned and foreclosed properties clears the market. GDP growth
expectations from private economists surveyed by The Wall Street Journal are on the order of 1.7% for the
first quarter of 2013 and 2.3% for all of 2013. This compares to GDP growth of 2.4%, 1.8%, and 2.2% in
2010, 2011, and 2012, respectively.
The Federal Reserve’s outlook concurs with that of many private economists by suggesting that GDP growth
is expected to continue but will likely remain constrained in the near-term due to slowing growth of foreign
economies, decreased government spending, weak labor and housing markets, continued consumer
deleveraging, and high levels of uncertainty among households and businesses. On average, economists
surveyed by The Wall Street Journal expect unemployment to decline to 7.6% by mid-2013 and then
continue downward to 7.4% by year-end 2013. Given the FOMC’s statements, it is unlikely there will be any
tightening of monetary policy until unemployment declines or inflation increases. Governmental response
to the financial and economic crisis has been significant. However, the existence and efficacy of future
stimulus is uncertain given the low interest rate environment (hampering the impact of accommodative
monetary policy) and political pushback against increased government spending in light of current deficit
spending and the record level of U.S. government debt. Further improvements in the labor and housing
markets will be necessary to support sustained growth going forward.
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