Job Claims, Factory Data Suggest Recovery Picking Up Steam

Government reports on weekly jobless claims, manufacturing activity and inflation offered fresh evidence the U.S. economic recovery is picking up steam.
New U.S. claims for unemployment benefits dropped to a 3 1/2 year low last week, a government report showed on Thursday, suggesting the labor market recovery was gaining speed. Initial claims for state unemployment benefits dropped 19,000 to a seasonally adjusted 366,000, the Labor Department said. That was the lowest level since May 2008.

A gauge of manufacturing in New York State showed growth accelerated in December to its highest level since May as new orders improved, the New York Federal Reserve said in a report on Thursday. The survey of manufacturing plants in the state is one of the earliest monthly guideposts to U.S. factory conditions. The gain in December added on to improvement last month that pulled the index out of a five-month contraction.

Wholesale prices rose a modest 0.3 percent last month, as companies paid more for such items as food and pharmaceuticals. But energy prices barely rose, keeping inflation in check.

Most economists say they think inflation has peaked and will slowly decline next year. That’s because prices for oil and many agricultural commodities have fallen from their highs this spring. Slower growth in China and a possible recession in Europe have reduced global demand for energy and other goods.
Lower price growth means consumers will have more buying power, potentially boosting consumer spending. The jump in gas and food prices earlier this year limited the ability of consumers to buy other goods, thereby slowing the economy.

Consumer spending rebounded in the July-September quarter as prices eased. The stronger spending helped increase growth to an annual rate of 2 percent from a slight 0.9 percent in the first half of the year. Economists expect consumer spending to rise again in the last three months of this year and think growth could top 3 percent. Federal Reserve policymakers, like many private economists, predict inflation will fall next year. That would give the central bank more latitude to hold down interest rates and potentially take other steps to stimulate the economy.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) gained +67 basis points from last Friday to the prior Friday which moved mortgage rates lower. Once again, the U.S. saw much better than expected economic data.  Both the N.Y. Empire and Philly Fed manufacturing data saw big increases and the Initial Weekly Jobless Claims fell below 390K.  We also saw very tame results in both the Consumer Price Index and the Producer Price Index which point to reduced inflationary pressure.  MBS rallied in the later part of the week on the heels of to very successful U.S. Treasury auctions. Both the 10 and 30 year auctions saw very strong demand which pushed rates lower.

This was due to a growing concern that the recent agreement out of the European Summit would not be enough to stem the tide in Europe.  This concern caused investors to snap our bonds even though the interest rates and returns are very low. Foreign investors simply want a place to put their funds, knowing that they will get those funds back.