Business Cycle Indicators: First look at 2013

Posted February 6, 2013 by rvillareal

Global Indicators

• GDP focus shifts to 2013. An accommodative Fed and relative strength in consumption and housing to continue. DE upgrades baseline prospect.
• China’s GDP figure for the fourth quarter of 2012 clocked in at 7.9% Y/Y. China’s industrial production jumped the last two months of 2012 suggesting that China has  “landed” and now a recovery is due. [private]

U.S. Consumer

• Confidence continues to be restrained after a meltdown in January.
• Personal income jumps due to dividend and other income payouts before tax code changes, growth likely unsustainable.

Housing Market

• Prices, starts, and sales on the upswing as inventories decline.
• The housing market appears to be recovering, supporting the DE bullish view on the housing sector over the next 18 months.

Labor Market

• Non-farm payrolls revised upwards in November and December to 257,000 and 196,000. January’s payroll lower at 157,000.
• The unemployment rate was 7.9% in January, far from the Fed’s 6.5% goal. Nevertheless, duration of unemployment took a turn sharply for the better.

Business Conditions

• January ISM reading unexpectedly strong as manufacturing sector swings away from inventory restraint, onto modestly stronger accumulation, on basis of increased future demand.
•  Small business may be being stifled by tax code changes implemented for the New Year.

Inflation Measures

• Inflation still below 2%, and capacity utilization below the 80% level that characterized rising inflation pressures in the pre-crisis years.

Financial Markets

•  DE raises its 2013 and 2014 estimates to $109 and $117, respectively.

DE Forecasts

• GDP: DE expects 2.25%-to-2.5% real GDP growth in 2013, against the 1.5% growth in 2012 (Q/Q). Current track for Q1 is 1.5%-to-2%.
• Unemployment: Moves lower to 7.7% in November, partly on smaller labor force. 7.3% by end of 2013 as Fiscal Cliff mostly avoided and QE3 takes hold.
• Interest rates: Fed to keep shorter term rates exceptionally low,  but the 10yr now in a higher range around 2%, long bond prices may edge lower. QE to persist until labor market improves, so long as inflation remains below 2.5%.
• Equities: Strategically bullish. DE’s fair value estimate for the S&P 500 is 1550, 1600 is DE’s target for the end of 2013. Operating EPS estimate raised to $109 in 2013, to $117 in 2014 (from $107-8 and $115 previously).

Business Cycle Indicators 02-05-13[/private]