The major economic indicators next week will be mixed, but positive on the whole. Markets, however, will focus on the February 24 semiannual monetary policy testimony of Ben Bernanke to Congress, in light of the Fed’s recent upward adjustment to the discount rate.
Durable goods orders will continue to motor up in January, and we expect a modest upward revision to fourth-quarter 2009 real GDP. New home sales are expected to jump in January, but existing home sales will be flat. The housing market is seeing very slow, gradual improvements. Consumer confidence indicators for February are expected to pull back modestly, as financial volatility increased quite a bit, clouding the future picture for the state of household wealth.
On February 24, Fed chairman Ben Bernanke will provide semiannual monetary policy testimony to Congress. Beyond providing a relatively upbeat assessment of the economic recovery, and highlighting significant improvements to the functioning of financial markets, the chairman will discuss the FOMC's quarterly central tendency projections, as released in the FOMC minutes from January 27.
Bottom line here is that the Federal Reserve's outlook has notched up very slightly since November 2009, with GDP growth in the 2.8–3.5% range for 2010 (which is in line with our forecast for 3.4%), with a year-end unemployment rate of 9.5–9.7%. The Fed's outlook for 2011, with growth projected in the 3.4–4.5% range, does look a little rich, especially in view of the manifest uncertainties on federal fiscal policy. The chairman will also provide an update on the Fed's "exit strategy," also discussed in detail within the recent FOMC minutes.
Chairman Bernanke will also address the recent decision of the Fed Board to raise the discount rate by 0.25 percentage point, which was a technical adjustment reflecting the normalization of liquidity conditions in the banking sector, but sent confusing signals to the market about an imminent change in the Fed policy stance. This needs to be clarified, and the chairman will likely address this issue directly in his prepared statement. If he doesn't, it will surely come up in the Q&A session.
IHS Global Insight has flagged that one of the major risks to the outlook would be a premature tightening from the Fed, as this would send rates up fairly sharply and put the brakes on the nascent recovery in the housing market, leading to another down cycle in housing activity. It would also stall and/or reverse the process of healing the banking system's ailing balance sheet—we do not want to go there.
KEY U.S. DATA RELEASES THIS WEEK
Tuesday, February 23 – Conference Board Consumer Confidence (Feb.)
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IHS Global Insight: 54.0
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Consensus: 54.8
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Last Actual: 55.9 (Jan.)
What to Look For
Implications
Although most of the economic news is positive, consumers remain worried about their financial situations. The February pause in the stock market rally will reinforce consumers' cautious attitudes toward spending. Looking ahead, a gradual improvement in the labor market will support income growth and sustain the recovery in consumer spending that began last summer.
Wednesday, February 24 – New Home Sales (Jan.)
What to Look For
Implications
It is difficult to get a good reading on conditions in the market for new homes, because the two homeowners' tax credits have shifted sales across time. January's new home sales figures will shed some light on market conditions. New home sales were down 9.3% in November and 7.6% in December. A third straight drop in sales could spell trouble for the housing market in 2010, but we expect some rebound from December's very weak level.
Thursday, February 25 – Durable Goods Orders (Jan.)
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IHS Global Insight: 2.4%
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Consensus: 1.4%
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Last Actual: 1.0% (Dec.)
What to Look For
Implications
About 40% of the projected increase will come from a rebound in aircraft. Most durables orders should show respectable gains of about 1%, but get an additional kick upwards from defense orders. There is strong underlying after-tax earnings momentum, and that should continue to provide solid momentum for orders in early 2010.
Friday, February 26 – Real Gross Domestic Product (Second estimate, Q4)
What to Look For
Implications
Based on December's data, it seems that inventories fell even less in the fourth quarter than initially estimated, so that their boost to growth will be even bigger. That positive should be partly offset by lower estimates for construction spending (especially state and local), and a smaller boost from foreign trade than first thought. The shift in the composition of growth—more inventories, less final sales—is mildly negative for first-quarter growth prospects.
Friday, February 26 – Michigan Consumer Sentiment Index (Final Feb.)
What to Look For
Implications
The final report should confirm the early February findings—consumers view the current economic situation more favorably, but they are a bit more pessimistic about the outlook for the economy and personal finances in the year ahead. After a solid January gain in retail sales, we expect that real consumer spending will increase at a 2.6% annual rate in the first quarter, up slightly from 2.0% growth in the fourth quarter of 2009.
Friday, February 26 – Existing Home Sales (Jan.)
What to Look For
Implications
Based on the latest Pending Home Sales reading, which was essentially flat, we project no change in existing home sales for January. The second homeowners’ tax credit—up to now—is having minimal effects. Mortgage applications to buy homes tumbled to their lowest level in 13 years during November, according to the Mortgage Bankers Association, and the February reading is on track to be lower than November's. We still believe that the effects of the second tax credit will kick in soon. But time is getting short, since homeowners have until April 30 to sign the contract and until June 30 to close the deal.
