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A Last Look Back

After several revisions, we now know the U.S. economy grew 1.4 percent in the fourth quarter of 2015. The good news is this percentage is twice as high as initially estimated. The unfortunate news is that it reflects a setback from much stronger growth in the second and third quarters of last year. The added growth in the fourth quarter came from more robust spending on services and a smaller decline in exports. Consumer spending was revised to 2.4 percent and added 1.66 percent to the overall growth calculation. A lack of corporate spending on equipment continues to be a drain on the economy. Corporate spending fell 2.1 percent in the fourth quarter. Corporate earnings declined 7.8 percent and could be a reason why companies have been reluctant to invest in expansion.

Other Key Indicators this Week:

Housing – The housing industry continues to face headwinds as Americans move into the Spring home shopping season. After reaching the second fastest selling pace since 2007, sales of previously owned homes plummeted 7.1 percent in February to a seasonally adjusted rate of 5.08 million. This is below the average monthly rate for 2015 of 5.23 million units. Single-family home sales fell 7.2 percent and condo sales dropped 6.7 percent. Sales declined the most in the Northeast and Midwest where blizzard-like weather in January may have affected contract signing. Signings are a precursor for actual closing activity.

Sales of new homes fared better, at least when looking at the overall number of sales. February sales were up 2.0 percent, a rebound from an upwardly revised decline of 7.0 percent the previous month. After delving into the details, the rise in sales is not that optimistic. The increase in February was largely due to a 39 percent surge in the western region of the U.S. The other major areas of the country posted moderate declines. Compared to a year ago, sales were down 6.1percent.

Inventory and price continue to hinder overall home sales. The average price for both new and previously owned homes are up over 2.5 percent from a year ago. Inventories are shrinking in both markets, putting additional pressure on price. The combination of higher prices and lack of supply is shutting out the first time homebuyer, a sector that on average accounts for 40 percent of homebuyers. The number of previously owned homes currently for sale is at a tight 4.4 month supply, down from a 4.8 month average in 2015. Single-family homes for sale are at the lowest February level since 1995.

Durable Goods – Orders for durable goods fell 2.8 percent in February. This was the third month out of the last four that orders declined. February’s activity was a reversal of a 4.2 percent gain in January. The proxy for business investment fell 1.8 percent, more than three times the estimate. Companies have had a difficult time bringing inventories in line with lower sales, resulting in a shrinking of new orders. Tucked in the report was a 27 percent decline in commercial aircraft orders. However, even when you strip out volatile transportation orders, durable goods orders declined 1.0 percent.

Fed Comments – The week was full of comments by Federal Reserve presidents and committee members on the fate of short-term interest rates. The overall gist of the rhetoric was a growing opinion that the Federal Reserve should and might raise interest rates sooner, rather than later. Even members who once sided with a more conservative, slower pace are now moving in the direction that the market should get ready for a rate hike regardless of current global economic conditions. The fed funds future market currently places just a 6.0 percent chance for a move in April, but thinks there is a 52 percent chance for July.

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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