Jim Kochan

Distortions, but progress

AdvantageVoice® Blog—12-3-12
James Kochan, Chief Fixed-Income Strategist

Hurricane Sandy created distortions in a host of economic indicators last month, including car sales, retail sales, industrial production, sales of new homes, and several of the regional manufacturing indices. As a result, the November Institute for Supply Management’s manufacturing index could be somewhat weaker than in previous months, while industrial production, car sales and retail sales could be somewhat stronger. The underlying trend for most of these indicators remains slowly upward. Manufacturing activity continues to add moderately to gross domestic product (GDP) growth, led by auto production. Sales of new cars and trucks are supported by replacement demand and favorable credit terms. Total consumer spending is being aided by moderate growth in employment and incomes and improving consumer confidence.

One factor boosting consumer confidence is a modest recovery in housing. Though the levels of housing starts and home sales are weak by past cyclical standards, they are improving. Home prices rose again in September and are now on a pace that could produce an average increase of close to 10% for the year. Some estimates have housing construction adding 0.5% to fourth quarter GDP growth.

Business spending has been a drag on GDP in the second half of 2012, partly because of the uncertainties surrounding the elections, the fiscal cliff, and the initiation of Obamacare. Many companies have put expansion and hiring plans on hold until next year, when they might have better clarity on taxes and the outlook for the economy. The exception is the energy sector, where spending remains very strong. Most forecasters expect a more universal improvement in capital spending in the first half of next year.

Inflation indices are again well behaved now that energy prices have stopped rising. The underlying trend of core inflation appears to be around 2% for the Consumer Price Index  and around 1.7% for the Personal Consumption Expenditures Deflator. Qualitative reports suggest that wage inflation is virtually nonexistent and that companies have only limited ability to raise prices. With inflation apparently contained, most members of the Federal Open Market Committee want the Fed to focus on reducing unemployment by maintaining a highly stimulative policy for the foreseeable future.

The views expressed are as of 12-3-12 and are those of Chief Fixed-Income Strategist James Kochan and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.


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