See this week's numbersFriday, January 20, 2017

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Economic Update
Has inflation made its debut?

Could it be the Federal Reserve found its crystal ball? In December, the Federal Reserve acknowledged that inflation was moving closer toward their target as one reason for increasing the short-term interest rate. Lo and behold, consumer prices posted their largest annual gain since June 2014. December’s consumer price index increased 2.1 percent from a year ago. Prices were up 0.3 percent from November, the fifth consecutive monthly increase. Apparel was the only major sector posting a decline, falling 0.7 percent. The sectors with the largest price gains were energy, up 1.5 percent, and airline fares, up 1.9 percent. The increase in airline fares was the largest since June 2015. Major holidays occurring over weekends last month may have influenced the sudden rise in prices.

Other Key Indicators this Week:

Housing – Construction on new homes rose 11.3 percent in December after falling 16.5 percent the prior month. The strength and reversal was due to large swings in multi-family housing activity. Buildings with two or more units declined 39 percent in November, only to rebound by 57 percent in December. Despite the monthly volatility in the housing data, housing construction increased for the sixth year in a row in 2016. Estimated housing starts in 2016 numbered 1.17 million units, an increase of 5.7 percent from a year ago. The bulk of the activity was in multi-family homes, up 10.3 percent. Single-family housing rose 3.9 percent in 2016. Recognizing the need for single-family housing, builders are optimistic for 2017. The National Association of Home Builders expects 10 percent growth in single-family housing next year. Optimism is based on hopes that reduced regulations will offset rising mortgage rates and land pieces.

Manufacturing – The first report of manufacturing activity in 2017 is good. The Empire Index, a measure of future business conditions by manufacturers in New York, rose 6.5 percent, just slightly below the prior month’s level. While the report is not a complete picture of activity across the nation, it is widely considered reflective of general conditions. Inventories rose 2.5 percent, the first increase in over a year. The weak spot remains with labor market conditions. Employers reported declines in employment and shorter work weeks. The six-month outlook for business conditions remains at a five-year high, conveying a high degree of optimism.

Beige Book – The Federal Reserve’s Beige Book gave a generally optimistic outlook from the 12 Federal Reserve districts across the country. Most of the districts reported the economy continued to expand modestly at the end of 2016. Manufacturers in most districts cited increased sales. Eight districts reported modest inflation, while the labor markets across the country were reported to be tight or tightening. Many districts cited inability to find skilled workers. Overall, firms and industries were optimistic about growth in 2017.

Strategically for Credit Unions:

Interest rates seem to be steadying after the sudden increase in December. The average national 30-year mortgage rate fell five basis points last week, which should keep potential homebuyers in the market. Loan demand appears to be gaining momentum early in the year. Credit unions should not have to adjust deposit or loan rates at this time to maintain their current deposit and loan activity.

Sarina Freedland – Senior Investment Officer

Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. This is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.

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