Indicators next week are expected to be somewhat mixed, but positive on the whole. While consumer confidence early in 2011 continues to wobble in response to higher gasoline prices, this is not expected to be a game changer in terms of consumer spending.

We expect upbeat reports on December new home sales and core durable goods orders, and later in the week a general ratification of recent good news on the economy, when we expect the BEA to report acceleration in overall growth from 2.6% in the third quarter of 2010 to near 3.5% in the fourth quarter. This will underpin another solid gain in U.S. business sector productivity.

Next week will be a signature week for earnings reports, with bellwether economic stocks such as 3M, Procter and Gamble, Boeing, Caterpillar, Ford, Honeywell, and Johnson & Johnson reporting.

KEY U.S. DATA RELEASES THIS WEEK

Tuesday, January 25 – Conference Board Consumer Confidence (Jan.)

• IHS Global Insight: 52.0
• Consensus: 54.7
• Last Actual: 52.5 (Dec.)

What to Look For

• The consumer confidence index is expected to drop an additional half point, to reach 52.0 in January.

Implications

The current and expectations indices should fall in tandem. This will be the second monthly decrease in a row, driven mostly by higher gasoline and food prices, and despite relatively strong holiday sales.

Wednesday, January 26 – New Home Sales (Dec.)

• IHS Global Insight: 0.298 Mil.
• Consensus: 0.300 Mil.
• Last Actual: 0.290 Mil. (Nov.)

What to Look For

• New home sales to report a slight improvement, rising 2.8%.

Implications

With a slowly improving job market, December sales should see a modest bounce from November's fifth-lowest reading on record (data go back to 1963). Thus, we project a slight increase (2.8%) to 298,000 based on the improving job market and generally better economic conditions. December's improvement in single-family housing permits (normally a good leading indicator for new home sales) might seem to point to a much stronger outcome. But December's rise in permits was distorted by pending building code changes in New York, Pennsylvania, and California.

Wednesday, January 26 – FOMC Press Release

Effective Federal Funds Rate

• IHS Global Insight: 0.00–0.25%
• Consensus: 0.00–0.25%
• Last Actual: 0.00–0.25%

What to Look For

• The Federal Reserve's FOMC is expected to vote to keep the general orientation of monetary policy unchanged.

Implications

We do not expect any change to the QE II program, and the federal funds rate is projected to remain in the range of 0.0% to 0.25%, with the usual future guidance of keeping rates "exceptionally low for an extended period." While the economy is improving, the rates of growth of output, prices, and employment are still far below the "thresholds" that would precipitate a policy change from the Fed. We expect the new FOMC members to generally support Chairman Bernanke's approach, with a possible dissent from Dallas Fed chief Fisher, in which case he would carry the baton passed on by Kansas City Fed chief Hoenig, who rotated off the FOMC at the end of 2010.

Thursday, January 27 – Durable Goods Orders (Dec.)

• IHS Global Insight: -0.5%
• Consensus: 1.5%
• Last Actual: -0.3% (Nov.)

What to Look For

• Overall durable goods orders to decline slightly, pulled down by aircraft orders.
• Core capital goods orders should have another good month.

Implications

Headline orders will be pulled down by another drop in aircraft orders, with sluggish gross new orders at Boeing combining with some cancellations to leave net new orders for complete aircraft near zero. However, we expect another good month for core capital goods (which exclude aircraft). Defense orders could provide a little lift, but nowhere near as much as last month when they bounced up from an 18-month low.

Friday, January 28 – Real Gross Domestic Product (Advance estimate, Q4)

• IHS Global Insight: 3.5%
• Consensus: 3.4%
• Last Actual: 2.6% (Third estimate, Q3)

What to Look For

• We expect fourth-quarter GDP to grow 3.5%, faster than the 2.6% increase in the third quarter.

Implications

Domestic final purchases (which exclude inventories and net foreign trade) should rise 3.2%, driven by a sharp acceleration in consumer spending growth to 4.1%, from 2.4% in the third quarter. Business fixed investment growth will slow—temporarily, we believe—to single digits, after double-digit gains in the second and third quarters. We expect huge, and roughly offsetting, movements in foreign trade and inventories. Net exports should improve dramatically, adding more than 3 percentage points to GDP growth. But we also expect a dramatic slowdown in inventory accumulation that subtracts more than 3 percentage points from growth. The two movements are related, because lower imports mean slower inventory accumulation. Because the movements in trade and inventories are expected to be so large, there is even more-than-usual uncertainty about the GDP outcome, which will be heavily influenced by the BEA's assumptions for December, for which we have no data for either trade or inventories. Complicating matters even further, we think that part of the decline in imports will be illusory, driven by an odd seasonal adjustment calculation for imported oil prices. We expect the bottom line from the report to be that there was a robust increase in domestic final purchases, combined with very low inventory accumulation—good signals for future growth prospects.

Friday, January 28 – Michigan Consumer Sentiment Index (Final Jan.)

• IHS Global Insight: 71.8
• Consensus: 73.0
• Last Actual: 72.7 (Preliminary Jan.)

What to Look For

• The Reuters\University of Michigan Index of Consumer Sentiment is expected to drop 2.7 points from December to reach 71.8 in January, below the preliminary reading of 72.7.

Implications

The current and expectations indices are both expected to fall, with the current situation index taking the bigger hit. Consumer sentiment is being undermined by high gasoline and food prices, although these are not severe enough to derail the increased consumer spending momentum.