U.S. Economy is "SOLID"

The Federal Reserve described economic activity as growing at a “solid pace,” when it convened its first policy meeting of the year. The subsequent release of the nation’s Gross Domestic Product confirmed that description. The first estimate (there are two more revisions due) of fourth quarter economic growth showed an expansion of 2.6 percent. While the result was about a half of a percentage point shy of estimates, even with the slowdown in the fourth quarter, “the economy expanded at a 4.3 percent annualized pace during the second half of the year.  That is hardly chopped liver,” according to Joel Naroff of Naroff Economic Advisors.

For 2014 as a whole, the economy grew by 2.4 percent – not bad, considering that there was a 2.1 percent contraction in the first three months of the year. (Bill McBride of Calculated Risk provides a more detailed discussion on how annual GDP growth is determined.) How does this growth rate stack up? It’s a touch higher than that the average 2.2 percent growth of 2010-2013, though below the post World War II average of 3.3 percent.

Also edging higher in 2014 was the Employment Cost Index (ECI), which measures pay and benefits. According to the government, ECI rose 2.2 percent in 2014, up a touch from the previous year and the fastest pace in six years. Still, in a healthy economy, the index usually rises at about a 3.5 percent pace. The saving grace on the pokey rate of wage growth is the low inflation rate, which at 1.3 percent, means that workers are able to make due.

The bright spot of the GDP report was found in consumer spending, which grew at a better than expected 4.3 percent annualized rate in the final three months of the year, the biggest gain since the first quarter of 2006. Imagine the pace of spending that could occur if American workers get a little raise in 2015!

There will be additional data in the week ahead, which should provide a more in depth picture of wages. In the beginning of the week, there will be a report on Personal Income and Spending and then on Friday, the January jobs report is due. It is expected that the economy added 230,000 new jobs and that the unemployment rate remaining at 5.6 percent.

MARKETS: After two strong years for stocks, there has been concern that the party could come to an end in 2015. Last week, mixed news on corporate earnings renewed fears that the increasing value of the U.S. dollar will hinder multi-national companies and act as a headwind for overall economic growth. Stock investors, who had to swallow the worst monthly performance in a year, make take solace in this bottom line analysis from Capital Economics “the combined impact of lower oil prices, the stronger dollar and lower long-term interest rates will be a big net positive, with more winners than losers.”

• DJIA: 17,165, down 2.9% on week, down 3.7% YTD
• S&P 500: 1995, down 2.8% on week, down 3.1% YTD
• NASDAQ: 4,635 down 2.6% on week, down 2.1% YTD
• Russell 2000: 1165, down 2% on week, down 3.2% YTD
• 10-Year Treasury yield: 1.68% (from 1.79% a week ago; the biggest one-month decline in yield since mid-2011)
• March Crude Oil: $48.24, up 5.8% on week, down 9.4% on month
• February Gold: $1,278.50, up 1.2% on week, up 8% on month, best monthly percentage gain since Jan 2012.
• AAA Nat'l average price for gallon of regular Gas: $2.05 (from $3.28 a year ago)

THE WEEK AHEAD:

Mon 2/2:

8:30 Personal Income and Spending

9:45 PMI Manufacturing

10:00 ISM Manufacturing

10:00 Construction Spending

Tues 2/3:

Chipotle, UPS, Disney

Motor Vehicle Sales

10:00 Factory Orders

Weds 2/4:

Clorox, GM, Merck, Yum Brands

8:15 ADP Private Jobs Report

10:00 ISM Non-Manufacturing

Thurs 2/5:

Dunkin Brands, GoPro, LinkedIn

8:30 Weekly Jobless Claims

8:30 International Trade

8:30 Productivity

Fri 2/6:

8:30 January Employment Report

3:00 Consumer Credit