Economic Week In Review

In last Wednesday’s Federal Reserve meeting, Fed officials stated that they now expect economic conditions will allow the fed funds rate to remain at exceptionally low levels until at least “late 2014″.  Wow!  The Fed has never been quite this clear for so long into the future.  Prior statements extended the expected time frame only to mid-2013.  In addition, comments from Fed Chief Bernanke suggested that Fed officials would like to see stronger economic growth, and they are open to the possibility of additional Fed easing.  Many investors think it is likely that the Fed will also announce the additional purchase of Mortgage-Backed Securities (MBS) at a later meeting as well.  The expectation for a low fed funds rate and the possibility of additional Fed purchases of MBS increased the demand for MBS last week, which resulted in higher MBS prices and lower mortgage rates.

Although this is great news for anyone with a Home Equity Line of Credit because the Prime Rate will stay so low for years to come, it is not good news for those with short-term savings accounts nor does it insure that long-term mortgage rates will stay low.  Other factors such as inflation, unemployment, and consumer confidence will dictate what happens with mortgage rates.  Nevertheless, the stage seems to have been set for mortgage rates to stay low for the foreseeable future, and that’s good news for the real estate community!

Also worth noting, Friday’s Gross Domestic Product (GDP) report showed an increase at a 2.8% annual rate during the fourth quarter of 2011, which was a little below the consensus forecast, but up from 1.8% during the third quarter.  Early estimates for the first quarter of this year are for a slower growth rate.  The long-run average growth rate for the economy is generally considered to be around 3.0%, and the economy usually grows at a faster than average rate following a recession.  Given that the economy is growing below its potential and that inflation remains tame, the Fed’s expectation that monetary policy will remain very stimulative for a long time is understandable.

There was some good economic news to report from last week as December Durable Goods Orders rose a strong 3% from November and Consumer Sentiment rose to the highest level in a year.  Significant progress also seems to have been made in reaching a new debt deal inGreece.  Unfortunately, though, the housing news wasn’t great as December Pending Home Sales declined 4% from November’s 19-month high and December New Home Sales declined 2.2% (as shown in the graph below).  2011 ended up being the worst year on record for New Home Sales. 

Looking forward, the biggest economic report this week will be the ever-so-important Employment data on Friday.  As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month.  Chicago PMI Manufacturing and Consumer Confidence are also fairly big reports that will be released today as well as ISM Manufacturing, Construction Spending, and ADP Employment on Wednesday.  Productivity, Factory Orders, and ISM Services round out a busy week.