Article: National Economic Conditions - 4th Quarter 2011

The U.S. Economy grew at its fastest pace in a year and a half during the fourth quarter, but lingering unemployment, low final sales (GDP less inventories), and continued pressure on European economic markets caution expectations on continued growth. In its January press release, the Federal Open Market Committee (“FOMC”) said that information received since its previous meeting in December “suggests that the economy has been expanding moderately, notwithstanding some slowing in global growth.”

Introduction

The U.S. Economy grew at its fastest pace in a year and a half during the fourth quarter, but lingering unemployment, low final sales (GDP less inventories), and continued pressure on European economic markets caution expectations on continued growth. In its January press release, the Federal Open Market Committee (“FOMC”) said that information received since its previous meeting in December “suggests that the economy has been expanding moderately, notwithstanding some slowing in global growth.”[1]The FOMC noted several factors that acted as barriers to growth:

• Although below last year’s figure, the unemployment rate remains above its historical average,
• Growth in business fixed investment has slowed, and
• The housing sector remains depressed.

Factors that helped contribute to the expansion in the economy were also mentioned, including:                                         

• Improvement in overall labor market conditions,
• Advances in household spending,
• Moderate current inflation, and
• Longer-term inflation projections have remained steady.[2]  

During its December meeting (to which the FOMC made no amendment in its January press release), participants stated that economic growth had met their expectations, as recent data on spending, production, and the labor market conformed to previous staff forecasts. However, the staff still made amendments to economic growth in the medium term, reflecting a changing outlook on European economic markets and the implications they may have for the U.S. economy:

The risks associated with the fiscal and financial difficulties in Europe […] contributed to heightened volatility in a wide range of asset markets. Investor concerns about developments in Europe intensified early in the period but subsequently eased a bit amid signs that European authorities were moving toward agreement on a comprehensive framework to address fiscal and financial vulnerabilities and after the Federal Reserve and five other major central banks announced enhanced currency swap arrangements, including lower charges on existing dollar liquidity swap lines. Nevertheless, investors appeared to remain cautious. […]

The staff continued to project that the pace of economic activity would pick up gradually in 2012 and 2013, supported by accommodative monetary policy, further increases in credit availability, and improvements in consumer and business sentiment. Over the forecast period, the gains in real GDP were anticipated to be sufficient to reduce the slack in product and labor markets only slowly, and the unemployment rate was expected to remain elevated at the end of 2013.[3]

Through its January press release, members of the FOMC publicly announced that they had agreed not to make changes to the existing federal funds rate (at 0 to ¼ percent) and anticipated that future economic conditions will likely mandate that the federal funds rate remain at abnormally low levels through late-2014, if not longer.[4]

Gross Domestic Product

The most commonly cited measure of general economic conditions is growth in real GDP. Real GDP is the real (adjusted for inflation) dollar value of all goods and services produced within the country in a given period. The Bureau of Economic Analysis (“BEA”) quarterly measure of real GDP is seasonally adjusted at annual rates (SAAR), which means that the figure has been annualized with seasonal effects removed.

Real GDP increased 2.8% (SAAR) in the fourth quarter of 2011 from $13,331.60 billion to $13,422.40 billion after increases of 0.4%, 1.3%, and 1.8% during the first, second, and third quarters of 2011, respectively. Real GDP increased 1.7% (not seasonally adjusted, “NSA”) in 2011, after annual changes of -0.3%, -3.5%, and 3.0% in 2008, 2009, and 2010 respectively.[5]

The increase in real GDP in the fourth-quarter reflected positive contributions from private inventory investment, personal consumption expenditures (PCE), exports, residential fixed investment, and nonresidential fixed investment that were partly offset by negative contributions from federal government spending and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The acceleration in real GDP in the fourth quarter primarily reflected an upturn in private inventory investment and accelerations in PCE and in residential fixed investment that were partly offset by a deceleration in nonresidential fixed investment, a downturn in  federal government spending, an acceleration in imports, and a decrease in state and local government spending.[6]

In January 2012, the FOMC predicted that real GDP growth would have a central tendency between 2.2% and 2.7%, between 2.8% and 3.2%, and between 3.3% and 4.0% during 2012, 2013, and 2014, respectively. In its longer-run projection, the FOMC predicted that real GDP growth would have a central tendency between 2.3% and 2.7% (consistent with its previous longer-run projection).[7]

The fourth quarter Philadelphia Federal Reserve Survey of Professional Forecasters (the “Philly Survey”) predicts real GDP growth of 1.9%, 1.9%, 1.4%, and 2.4% (SAAR) for the first, second, third, and fourth quarters of 2012, respectively. The Philly Survey further predicts annual GDP growth of 1.9% during 2012.[8] 

The January Wall Street Journal Survey of Economic Forecasters (the “WSJ Survey”) estimates that real GDP grew at an annualized rate of approximately 3.1% in the fourth quarter of 2011. In addition, the WSJ Survey predicts growth rates of 2.2%, 2.3%, 2.4%, and 2.6% (SAAR), for the first, second, third, and fourth quarters of 2012, respectively. The WSJ Survey projects GDP will experience annual growth rates of 2.4% in 2012.[9]

Economists attribute much of the fourth quarter growth to a boost in inventories.[10] There remain doubts as to whether this growth can be sustained in the following quarters without increases to consumer spending and greater confidence in European financial markets:

Most economists expect businesses to ease up on restocking in the first three months of the year. That should slow first-quarter growth. And consumers may cut back on spending if their wages continue to lag inflation.

Many economists worry that a recession in Europe could dampen demand for U.S. manufactured goods, which would slow growth. And without more jobs and better pay, consumer spending is likely to stagnate.[11] 

However, an article in the New York Times points to the rise in inventory as a potential indication of growing strength in the economy:

Among the more optimistic signs recently, many American companies have reported strong profits in recent months. In addition, new orders for manufactured durable goods […] exceeded economists’ expectations in December by growing 3 percent.

And companies like General Electric and Lockheed Martin closed the year with record order backlogs, a sign that, at least for some businesses, demand is so strong that they cannot produce quickly enough. The backlogs portend solid manufacturing growth going forward, and suggest to some economists that the United States could weather the European sovereign debt crisis relatively unscathed after all.[12]

[13] 

Prices and Inflation

Inflation is the increase in the general price level of goods and services in an economy. The Consumer Price Index (CPI) is the most commonly cited measure of inflation. The CPI measures the price of a standard market basket of goods designed to be representative of the items purchased by a typical urban consumer.

The CPI decreased at an annualized rate of approximately 0.1% during the fourth quarter of 2011, from 227.0 in the third quarter to 226.7 (1982-1984=100, seasonally adjusted). The fourth quarter decrease came after growth rates of 1.5%, 0.4%, and 1.2% in the first, second, and third quarters of 2011, respectively. Additionally, the CPI increased approximately 3.0% over the last twelve months (from December 2010 to December 2011), compared to annual changes in the CPI (not seasonally adjusted, “NSA”) of 3.8%, -0.4%, 1.6%, and 3.2% during 2008, 2009, 2010, and 2011, respectively.[14]

 The Philly Survey anticipates annualized growth in the CPI of 2.0%, 1.9%, 2.0%, and 2.0% (SAAR) for the first, second, third, and fourth quarters of 2012, respectively. Furthermore, the Philly Survey predicts annual (quarter four over quarter four) CPI growth of 1.9% and 2.2% for 2012 and 2013, respectively.[15] 

The WSJ Survey predicts the CPI will grow 2.2% and 2.2% over the twelve months ended June and December, respectively, and 2.3% in the twelve months ended June 2013.[16]

The CPI for food increased from 230.7 in the third quarter of 2011 to 231.6 in the fourth quarter of 2011 (1982–1984=100), a 0.4% increase. The fourth quarter increase followed changes of 1.8%, 1.0%, and 1.4% during the first, second, and third quarters of 2011, respectively. The CPI for food increased 4.7% in the last twelve months (from December 2010 to December 2011). In comparison, the CPI for food (NSA) had annual growth rates of 5.5%, 1.8%, 0.8%, and 3.7% during 2008, 2009, 2010, and 2011, respectively.[17]

The CPI for energy decreased 4.8% in the fourth quarter of 2011 from 252.3 in the third quarter of 2011 to 240.1 (1982–1984=100, seasonally adjusted). The fourth quarter increase followed changes of 9.2%, -3.3%, and 6.1% in the first, second, and third quarters of 2011, respectively. The CPI for energy increased approximately 6.6% in the last twelve months (from December 2010 to December 2011). In comparison, the CPI for energy (NSA) experienced annual changes of 13.9%, -18.4%, 9.5%, and 15.4% in 2008, 2009, 2010, and 2011, respectively.[18]

[19]

At its December meeting, the FOMC expressed expectations for a continued slow rate of inflation:

The upward pressure on consumer prices from the increases in commodity and import prices earlier in the year was expected to continue to subside in the current quarter. With long-run inflation expectations stable and substantial slack in labor and product markets anticipated to persist over the forecast period, the staff continue to project that inflation would be subdued in 2012 and 2013.[20] 

The Producer Price Index (PPI) is another commonly cited measure of inflation. The PPI measures the price of a standard market basket of goods designed to be representative of the items purchased by a typical producer. The PPI for all finished goods decreased 0.2% in the fourth quarter of 2011, from 192.9 in the third quarter of 2011 to 192.6 (1982=100). The fourth quarter decrease followed increases of 3.3%, 0.5%, and 1.2% in the first, second, and third quarters of 2011, respectively. The PPI for all finished goods increased 4.8% in the last twelve months (from December 2010 to December 2011). In comparison, the PPI for all finished goods (NSA) experienced annual changes of 6.3%, -2.6%, 4.2%, and 6.0% during 2008, 2009, 2010, and 2011, respectively.[21]

 [22]

The average price per barrel of oil increased 15.2% in the fourth quarter of 2011 from an average of $85.52 in September 2011 to an average of $98.56 in December 2011. The price per barrel of oil increased 10.6% in the last twelve months (from December 2010 to December 2011). In comparison, the average price per barrel of oil experienced annual changes of 37.8%, -37.8%, 28.3%, and 19.4% in 2008, 2009, 2010, and 2011, respectively.[23]

The WSJ Survey projects the price per barrel of oil will be $98.54 by June 30, 2012. It further projects the price per barrel of oil to be $99.41 by December 31, 2012.[24]

IBISWorld expects that the price per barrel of oil will decrease approximately 0.7% in 2012. Furthermore, IBISWorld predicts the price per barrel of oil will experience annual changes of -8.8%, 11.7%, and 4.4% in 2012, 2013, and 2014, respectively. Over the five years to 2016, IBISWorld expects the price per barrel of oil to grow at an average annualized rate of approximately 3.0%.[25]

 [26]

Trade Deficit

Real net exports decreased (became more negative) from a third quarter total of -$402.8 billion (SAAR) to ‑$405.8 billion in the fourth quarter of 2011. The 2011 fourth quarter level of real net exports was preceded by real net exports of -$424.4 billion and -$416.4 billion in the first and second quarters of 2011, respectively. Prior to 2010, real net exports had consistently increased, posting annual totals of -$494.8 billion and ‑$358.8 billion in 2008 and 2009. The prevailing trend reversed in 2010 with real net exports decreasing to ‑$421.8 billion. This trend continued in 2011 as real net exports increased once again to an annual total of ‑$412.3 billion in 2011.[27] 

The Philly Survey predicts real net exports will be -$408.9 billion, -$410.9 billion, -$410.6 billion, and -$405.8 billion in the first, second, third, and fourth quarters of 2012, respectively. On an annual basis, the Philly Survey projects real net exports will increase from -$414.4 billion in 2011 to -$408.1 billion in 2012.[28]

  [29]

Interest Rates 

Interest rates remained stable during the fourth quarter of 2011. The discount window rate remained constant at 0.75% as it had for the majority of 2010 and the first half of 2011. The 0.75% rate is an increase from the rate of interest prevalent throughout 2009 (0.50%), a historically low rate that was the result of a downward trend that began in July 2007 (6.25%).[30]

The federal funds rate decreased 1 basis point in the fourth quarter of 2011 from 0.08% in third quarter of 2010 to 0.07%. The current rate represents a decrease of 11 basis points over the last twelve months (from December 2010 to December 2011).[31] In the minutes to the December 13, 2011 FOMC meeting, meeting participants agreed to continue its target range for the federal funds rate (between 0 and 0.25%). The FOMC reiterated its position from last quarter that current “Economic conditions—low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”[32]

A New York Times article, published subsequent to the January FOMC meeting, provided the following interpretation:

The decision means that the Fed does not expect the economy to complete its recovery from the 2008 crisis over the next three years. By holding rates near zero, the Fed hopes to hasten the process somewhat by reducing the cost of borrowing.[33]

In a press release published after the meeting, the Fed outlined the particular factors under consideration:

While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investments has slowed, and the housing sector remains depressed. Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable.[34]

The yield to maturity on 20-year U.S. Treasury bonds decreased 16 basis points in the fourth quarter of 2011, from 2.83% in the third quarter of 2011 to 2.67%. The yield decreased 150 basis points during the last twelve months (from December 2010 to December 2011).[35] The average yield to maturity on Aaa rated (Moody’s) corporate bonds decreased 16 basis points from 4.09% in September 2011 to 3.93% in December 2011. The yield decreased 109 basis points during the last twelve months.[36]

  [37]

Financial Markets 

The Dow Jones Industrial Average (DJIA) increased 12.0% in the fourth quarter of 2011 from 10,913.38 on September 30, 2011 to 12,217.56 on December 31, 2011. The fourth quarter increase followed changes of 6.4%, 0.8%, and -12.1% in the first, second, and third quarters of 2011, respectively. The DJIA increased 5.5% in the last twelve months (from December 31, 2010 to December 31, 2011). In comparison, the DJIA had annual (December to December) changes of -33.8%, 18.8%, and 11.0% during 2008, 2009, and 2010, respectively. The DJIA peaked on October 11, 2007 at 14,279.96 and then reached a recent low of 6,440.08 on March 9, 2009.[38]

The S&P 500 increased approximately 11.2% from 1,131.42 on September 30, 2011 to 1,257.60 on December 31, 2011. The fourth quarter increase in the S&P followed changes of 5.4%, -0.4%, and -14.3% during the first, second, and third quarters of 2011, respectively. The index remained stable over the last twelve months (from December 31, 2010 to December 31, 2011). Historically, the index had annual changes (December to December) of -38.5%, 23.5%, and 12.8% in 2008, 2009, and 2010, respectively. The S&P 500 hit its recent high of 1,576.09 on October 11, 2007 and its recent low of 666.79 on March 6, 2009.[39]

The NASDAQ Composite Index increased 7.9% from 2,415.40 on September 31, 2011 to 2,605.15 on December 31, 2011. The fourth quarter increase followed changes of 4.8%, -0.3%, and -12.9% in the first, second, and third quarters of 2011, respectively. The index decreased 1.8% in the last twelve months (from December 31, 2010 to December 31, 2011). In comparison, the NASDAQ had annual changes of -40.5%, 43.9%, and 16.9% in 2008, 2009, and 2010, respectively. The NASDAQ reached its recent high of 2,887.75 on May 2, 2011 and its recent low of 1,265.52 on March 9, 2009.[40] 

 [41] 

Housing, Construction, and Real Estate

Average mortgage rates for 30-year fixed mortgages decreased 15 basis points in the fourth quarter of 2011, from 4.11% (the average rate for September 2011) to 3.96% (the average rate for December 2011). Additionally, average mortgage rates decreased 75 basis points during the last twelve months (from December 2010 to December 2011).[42] According to IBISWorld, the average annual 30-year conventional mortgage rates during 2010 and 2011 were approximately 4.69% and 4.50, respectively. Moreover, IBISWorld projects average annual 30-year mortgage rates of 4.12%, 4.43%, 4.95%, 5.22%, and 5.30% during the five years to 2016, respectively.[43]

At its December meeting, the Fed offered the following summary:

Activity in the housing market continued to be depressed by the substantial inventory of foreclosed and distressed properties and by weak demand that reflected tight credit conditions for mortgage loans and uncertainty about future home prices. Starts and permits for new single-family homes in October stayed around the low levels that prevailed since the middle of last year. Sales of new and existing homes remained slow in recent months, and home prices moved down further.

Real business spending for nonresidential construction moved up in October but was still at a low level, reflecting high vacancy rates and restricted credit conditions for construction loans.[44]

According to the New York Times, members of the Fed have discussed intervention: 

Some Fed officials have suggested that the Fed should buy mortgage-backed securities, as it did in 2009, to reduce interest rates on mortgage loans further. Such a program also could reduce interest rates on other kinds of loans, like corporate borrowing. Officials say the possibility of new asset purchases remains under consideration.[45]

[46]

With mortgage rates at or near historically low levels, fourth quarter (2011) statistics indicate that there was some improvement made in the nation’s housing market in the final quarter of the year. Housing starts increased 1.7% by the end of the fourth quarter of 2011, from 646,000 starts (SAAR) in September 2011 to 657,000 starts in December 2011. The fourth quarter increase followed changes of 12.7%, 3.7%, and 5.0% during the first, second, and third quarters of 2011, respectively. Annual housing starts increased 24.9% over the last 12 months (from December 2010 to December 2011). In comparison, housing starts experienced annual rates of growth (NSA) of -33.2%, -38.8%, 5.9%, and 3.4% during 2008, 2009, 2010, and 2011, respectively. Housing starts increased from 587,000 in 2010 to 606,900 in 2011.[47]

The Philly Survey projects total housing starts will reach an annual rate of approximately 630,000 in the first quarter of 2012, and then grow to starts totaling 650,000, 690,000, and 720,000 in the second, third, and fourth quarters of 2012, respectively. The Philly Survey estimates that in 2011 there were approximately 600,000 housing starts. In addition to its quarterly projections, the Philly Survey predicts annual housing starts will total 670,000 in 2012.[48] Housing starts hit a recent peak of 2.3 million (SAAR) in January 2006.[49]

As of January, the WSJ Survey predicts that annual housing starts will reach 730,000 in 2012.[50]

Houses sold increased 1.7% by the end of the fourth quarter of 2011, from 302,000 (SAAR) houses sold in September 2011 to 307,000 in December 2011. This increase came after decreases of 7.9%, 0.7%, and 0.3% during the first, second, and third quarters of 2011, respectively. The August 2010 rate of 278,000 houses sold was the lowest in recorded history (with data dating back to January 1959). Houses sold annually (NSA) decreased 6.5% in 2011, compared to decreases of 37.5%, 22.7%, and 13.9% during 2008, 2009, and 2010 respectively.[51]

Houses for sale decreased 2.5% by the end of the fourth quarter of 2011, from 161,000 houses for sale in September 2011 to 157,000 in December 2011. The fourth quarter drop in the number of houses for sale followed decreases of 6.3%, 6.7%, and 3.0% in the first, second, and third quarters of 2011, respectively. The total number of houses for sale at the conclusion of the fourth quarter of 2011 (157,000) is the lowest figure in a recorded history that dates back to January 1963. Houses for sale (NSA) decreased at an annual rate of 17.0% in 2011, following decreases of 29.0%, 34.1%, and 19.0% in 2008, 2009, and 2010, respectively.[52] 

The months of supply of houses for sale represents the number of months it would take to sell all of the houses currently up for sale at the existing sales rate (seasonally adjusted). The months of supply of houses for sale decreased from 6.2 months in September 2011 to 6.1 months in December 2011.[53] The months of supply of houses for sale decreased 11.1% over the twelve months ended December 2011,[54] compared to annual rates of change (NSA) of 13.5%, -14.8%, -5.9%, and -11.3% for the four years to 2011, respectively.[55]

 [56]

Unemployment

The average unemployment rate decreased 50 basis points in the fourth quarter of 2011, from 9.0% in the third quarter of 2011 to 8.5%. Prior to its fourth quarter decrease, the unemployment rate experienced changes of -50, 20, and -10 basis points in the first, second, and third quarters of 2011, respectively. In addition, the average unemployment rate decreased 90 basis points in the last twelve months (from December 2010 to December 2011). The average annual unemployment rate (NSA) had basis point changes 120, 350, 30, and -70 in the four years to 2011, respectively.[57] In January 2012, the FOMC announced that the unemployment rate would have central tendencies between 8.2% and 8.5%, between 7.4% and 8.1%, and between 6.7% and 7.6% during 2012, 2013, and 2014, respectively. The FOMC projects the longer-run central tendency for the unemployment rate will be between 5.2% and 6.0%.[58]

The Philly Survey projects average annual unemployment rates of 8.8%, 8.4%, and 7.8% over the three years to 2014, respectively.[59]

The WSJ Survey predicts the unemployment rate will be 8.5% at June 2012, with the rate declining over the course of this year and the next to 8.2% at December 2012 and 8.0% at June 2013.[60]

A CNNMoney article provides the following analysis:

The manufacturing sector – a focal point of President Obama’s latest jobs speeches – added 50,000 jobs in January. Manufacturing accounted for 14% of the job gains in the last 13 months.

Professional and business services added 70,000 jobs, and education and health services added 36,000 jobs.

But the government has also been bleeding jobs since the middle of 2010, and continued to do so last month. Most of the recent job losses have been at the state and local level. Overall, the public sector cut 14,000 jobs in January.[61]

Meanwhile, Binyamin Appelbaum, of The New York Times, suggests that current trends in the unemployment rate omit a noteworthy underlying concern, an increase in discouraged workers no longer seeking employment:

The pace of growth is not fast enough to significantly reduce the number of people who need work. Almost 24 million Americans could not find full-time jobs in December. A major reason that the official unemployment rate has declined in recent months is that many people have stopped looking for work.[62]

[63]

Forward Looking Indicators

The Index of Consumer Sentiment (ICS) is a measure of overall consumer expectations and a predictor of consumer spending and economic conditions. A higher ICS indicates that consumers have higher confidence in the economy and are consequently more likely to spend. The ICS was estimated to be 69.9 (1966=100) in December 2011, a 17.7% increase from the September 2011 ICS of 59.4. The fourth quarter increase in consumer sentiment followed changes of -9.4%, 5.9%, and -16.9% in the first, second, and third quarters of 2011, respectively. In the twelve months ended December 2011, the ICS decreased 6.2%. In comparison, the ICS experienced annual (December to December) growth rates of -20.4%, 20.6%, and 2.8% in 2008, 2009, and 2010, respectively.[64]

[65]

Richard Curtin, the Survey of Consumers chief economist, expressed some doubts as to whether the current rise in consumer confidence signals an eminent recovery. According to Curtin, job gains will determine continued success:

Although the current level of confidence has nearly regained its highest level since the recession, this is the third consecutive year that confidence has mounted a comparable rally. All prior rallies failed when consumers concluded that the improvement they had anticipated had failed to matierialize. The recent gains in confidence are now critically dependent on continued job gains. […] There is no symmetry between the rate of job gains and spending: lower job gains will have a disproportionate negative impact on spending.[66]

The Conference Board’s Leading Economic Index (LEI) is a signalling measure of the business cycle in which cyclical turning points of the LEI have historically taken place “before those in aggregate economic activity.” The LEI is an average of ten “leading” indicators.[67]

The following excerpt regarding the release of January’s LEI was offered by Ken Goldstein, an economist at The Conference Board:

The CEI [Coincident Economic Index] and other recent data reflect an economy that ended 2011 on a positive note, and the LEI provides some reason for cautious optimism in the first half of 2012. This somewhat positive outlook for a strengthening domestic economy would seem to be at odds with a global economy that is losing some steam. Looking ahead, the big question remains whether cooling conditions elsewhere will limit domestic growth or, convesely, growth in the U.S. will lend some economic support to the rest of the globe.[68]

Ataman Ozyildirim, another economist with The Confidence Board, added, “The gain was widespread among the leading indicators, suggesting economic conditions should improve in early 2012.”

Industrial Production

The Total Industrial Production Index (a measure of total output from industrial companies) increased 0.8% in the fourth quarter of 2011, from 94.38 during the third quarter of 2011 to 95.10 (2007=100, seasonally adjusted). The fourth quarter increase in Industrial Production followed changes of 1.2%, 0.2%, and 1.5% in the first, second, and third quarters of 2011, respectively. The index increased 3.7% in the last twelve months (from the fourth quarter of 2010 to the fourth quarter of 2011). Comparatively, the index had annual growth rates (NSA) of -3.7%, -11.2, 5.3%, and 4.1% in 2008, 2009, 2010, and 2011, respectively.[69]

The Philly Survey predicts the index will increase 3.2%, 3.7%, 3.3%, and 2.8% in the first, second, third, and fourth quarters of 2012, respectively.[70]

The capacity utilization rate measures the usage of the total production capacity for 89 detailed U.S. industries (71 in manufacturing, 16 in mining, and 2 in utilities). The capacity utilization rate is calculated by dividing the seasonally-adjusted output index by the capacity index of these industries.[71]

The capacity utilization rate increased 39.5 basis points in the fourth quarter of 2011 (to 78.0%), up from approximately 77.6% in the third quarter of 2011. The fourth quarter increase came after basis point changes of 72, -11, and 94 in the first, second, and third quarters of 2011, respectively. The capacity utilization rate increased 193.4 basis points in the last twelve months (from December 2010 to December 2011). Historically, the rate had annual basis point changes of -320, -861, 530, and 283 in the years 2008 through 2011, respectively.[72]

At its January meeting, the FOMC used recent data to provide the following interpretation:

Industrial production rose in October, reflecting in part a rebound in motor vehicle production from the effects of supply chain disrupations earlier in the year. Factory output outside the motor vehicle sector also continued to rise, and the rate of manufacturing capacity utilization moved up. However, motor vehicle assemblies were scheduled to only edge higher, on balance, in the coming months, and broader indicators of manufacturing activity, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, were at levels that suggested only modest increases in production in the near term.

 [73]

DISCLAIMER STATEMENT:

This Decosimo Advisory Services National Economic Conditions report summarizes general economic conditions as of December 31, 2011. It was prepared as of February 4, 2012. Information was gathered from sources we believed to be reliable using data available as of the date shown in the respective footnote. DAS accepts no responsibility for the accuracy of information provided in this summary. No statement in this report is to be considered advice for any purpose. It is the responsibility of the user of this report to verify the accuracy of the information herein and to relate the information contained herein to the particular application of its use. Tables of Data referenced in footnotes are available on request from Decosimo Advisory Services. 

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[1] Board of Governors of the Federal Reserve System. Federal Reserve Press Release, January 25, 2012. http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm, accessed 1/30/2012.

[2] Board of Governors of the Federal Reserve System. Federal Reserve Press Release, January 25, 2012. http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm, accessed 1/30/2012.

[3] Board of Governors of the Federal Reserve System. Minutes of the Federal Open Market Committee: Participants’ Views  on Current Conditions and the Economic Outlook, December 13, 2011. http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm, accessed 2/3/2012.

[4] Board of Governors of the Federal Reserve System. Federal Reserve Press Release, January 25, 2012. http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm, accessed 1/30/2012.

[5] U.S. Department of Commerce Bureau of Economic Analysis. Historical Table 1.1.1. Percent Change from Preceding Period in Real Gross Domestic Product and Historical Table 1.1.6. Real Gross Domestic Product, Chained Dollars. http://www.bea.gov/national/nipaweb/SelectTable.asp?Selected=Y, accessed 1/30/2012.

[6] U.S. Department of Commerce Bureau of Economic Analysis. National Income and Product Accounts Gross Domestic Product: 4th Quarter and Annual 2011 (Advance Estimate); January 27, 2012. http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm, accessed 1/27/2012.

[7] Board of Governors of the Federal Reserve System. Federal Reserve Press Release, January 25, 2012. http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm, accessed 2/5/2012.                           

Note:                                                                                                                

Projections of change in real gross domestic product (GDP) and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy. The January projections were made in conjunction with the meeting of the Federal Open Market Committee on January 24-25, 2012.

1. The central tendency excludes the three highest and three lowest projections for each variable in each year.

2. The range for a variable in a given year consists of all participants’ projections, from lowest to highest, for that variable in that year.

3. Longer-run projections for core PCE inflation are not collected.

[8] Survey of Professional Forecasters, Fourth Quarter 2011. Federal Reserve Bank of Philadelphia. November 14, 2011. http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters, accessed 1/30/2012.

[9] The Wall Street Journal. The Wall Street Journal Economic Forecasting Survey – January 2011. http://online.wsj.com/public/page/economic-forecasting.html, accessed 1/30/2012.

[10] Reuters. Instant View: U.S. growth quickens in Q4, but speed bumps ahead. http://news.yahoo.com/instant-view-econmic-growth-quickens-q4-133816524.html, accessed 1/27/2012.                                                        

[11] Reuters. Economy grew modest 2.8 pct. in Q4, best in 2011. news.yahoo.com/economy-grew-modest-2-8-pct-best-133200837.html, accessed 1/27/2012.

[12] New York Times. U.S. Recovery Slowly Gained Speed in Late ’11, Data Show. http://www.nytimes.com/2012/01/28/business/economy/us-economy-grows-at-modest-2-8-percent-rate.html, accessed 1/27/2012.

[13]U.S. Department of Labor Bureau of Labor Statistics Database: Labor Force Statistics including the National Unemployment Rate. http://www.bls.gov/cps/, accessed 1/30/2012. Asterisk (*) denotes projections from The Board of Governors of the Federal Reserve System: Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, January 25, 2011. http://federalreserve.gov/monetarypolicy/files/fomcprojtabl20111102.pdf, accessed 1/30/2012.

The Wall Street Journal. The Wall Street Journal Economic Forecasting Survey – January 2012. http://online.wsj.com/public/page/economic-forecasting.html, accessed 1/30/2012.

Survey of Professional Forecasters, Fourth Quarter 2011. Federal Reserve Bank of Philadelphia. Released November 14, 2011. http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/2011/survq311.cfm, accessed 1/30/2012.

[14] U.S. Department of Labor Bureau of Labor Statistics Database. Consumer Price Index – All Urban Consumers. http://www.bls.gov/cpi/#data, accessed 1/30/2012.

[15] Survey of Professional Forecasters, Fourth Quarter 2011. Federal Reserve Bank of Philadelphia. November 14, 2011. http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters, accessed 1/30/2012.

[16] The Wall Street Journal. The Wall Street Journal Economic Forecasting Survey – January 2011. http://online.wsj.com/public/page/economic-forecasting.html, accessed 1/30/2012.

[17] U.S. Department of Labor Bureau of Labor Statistics Database. Consumer Price Index – All Urban Consumers. http://www.bls.gov/cpi/#data, accessed 1/30/2012.

[18] U.S. Department of Labor Bureau of Labor Statistics Database. Consumer Price Index – All Urban Consumers. http://www.bls.gov/cpi/#data, accessed 1/30/2012.

[19] U.S. Department of Labor Bureau of Labor Statistics Database. Consumer Price Index – All Urban Consumers. http://www.bls.gov/cpi/#data, accessed 1/30/2012.See Table NEC-3, available on request from DAS.

[20]Board of Governors of the Federal Reserve System. Minutes of the Federal Open Market Committee: Participants’ Views  on Current Conditions and the Economic Outlook, December 13, 2011. http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm, accessed 2/3/2012.

[21] U.S. Department of Labor Bureau of Labor Statistics Database. Producer Price Index – Commodities. http://www.bls.gov/ppi/#data, accessed 1/30/2012.

[22] U.S. Department of Labor Bureau of Labor Statistics Database. Producer Price Index— Commodities. http://www.bls.gov/ppi/#data, accessed 1/30/2012. See Table NEC-3, available on request from DAS.

[23] Energy Information Administration, Official Energy Statistics from the U.S. Government. Cushing, OK WTI Spot Price FOB (Dollars per Barrel). Monthly data & Annual Data. http://tonto.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RWTC&f=M, accessed 1/30/2011. See NEC-3, available on request from DAS.

[24] The Wall Street Journal. The Wall Street Journal Economic Forecasting Survey – January 2011. http://online.wsj.com/public/page/economic-forecasting.html, accessed 1/30/2012.

[25] IBISWorld Business Environment Report: World Price of Crude Oil. A5211, November, 2011. http://www.ibisworld.com, accessed 1/30/2012.

[26] Energy Information Administration, Official Energy Statistics from the U.S. Government. Cushing, OK WTI Spot Price FOB (Dollars per Barrel): Annual data: http://tonto.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RWTC&f=A, accessed 1/30/2012. Asterisk (*) denotes projection from IBISWorld Business Environment Report: World Price of Crude Oil. A5211, November, 2011. http://www.ibisworld.com, accessed 1/30/2012. See Table NEC-2, available on request from DAS.

[27] U.S. Department of Commerce Bureau of Economic Analysis. Historical Table 1.1.6. Real Gross Domestic Product, Chained Dollars. http://www.bea.gov/national/nipaweb/SelectTable.asp?Selected=Y, accessed 1/30/2012.

[28]Survey of Professional Forecasters, Fourth Quarter 2011. Federal Reserve Bank of Philadelphia. November 14, 2011. http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters, accessed 1/30/2012.

[29] U.S. Department of Commerce Bureau of Economic Analysis. Historical Table 1.1.1. Percent Change from Preceding Period in Real Gross Domestic Product and Historical Table 1.1.6. Real Gross Domestic Product, Chained Dollars. http://www.bea.gov/national/nipaweb/SelectTable.asp?Selected=Y, accessed 1/30/2012. Asterisk (*) denotes projection from Survey of Professional Forecasters, Fourth Quarter 2011. Federal Reserve Bank of Philadelphia. Released  November14, 2011. http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/2011/spfq311.pdf, accessed 1/30/2012. See Tables NEC-1 and NEC-2, available on request from DAS.

[30] Federal Reserve Board Statistical Release Historical H.15 Selected Interest Rates. http://www.federalreserve.gov/releases/h15/data/Monthly/H15_DWPC_NA.txt, accessed 1/30/2012.

[31] Federal Reserve Board Statistical Release Historical H.15 Selected Interest Rates. http://www.federalreserve.gov/releases/h15/data/Monthly/H15_DWPC_NA.txt, accessed 1/30/2012.

[32] The Board of Governors of the Federal Reserve System Minutes of the Federal Open Market Committee: Press Release, December 13, 2011. http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20110622.pdf, accessed 1/30/2012.

[33]New York Times.  Fed Sees Rates Staying Near Zero Through Late 2014. http://www.nytimes.com/2012/01/26/business/economy/fed-to-maintain-rates-near-zero-through-late-2014.html, accessed 1/25/2012.

[34]Board of Governors of the Federal Reserve System. Federal Reserve Press Release, January 25, 2012. http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm, accessed 2/5/2012.

[35] Federal Reserve Board Statistical Release Historical H.15 Selected Interest Rates.

http://www.federalreserve.gov/datadownload/Build.aspx?rel=H15, accessed 1/30/2012.

[36] Federal Reserve Board Statistical Release Historical H.15 Selected Interest Rates.

http://www.federalreserve.gov/datadownload/Build.aspx?rel=H15, accessed 1/30/2012.

[37] Federal Reserve Board Statistical Release Historical H.15 Selected Interest Rates.

http://www.federalreserve.gov/datadownload/Build.aspx?rel=H15, accessed 1/30/2012. See Table NEC-4, available on request from DAS.

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