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May 13, 2013

Economic Update

By Georgi Popov '13  |  may, 2013, Issue 1
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Last week was great for equities. The Dow closed at 14,973 on May 3, while the S&P500 finished that week at 1,614.42, or 13.2% higher since the beginning the year. The rally was spurred by stronger than expected payroll employment gains, a lower unemployment rate and continued support by the Federal Reserve.

The Bureau of Labor Statistics announced that the U.S. economy added 165,000 jobs in April, and it revised the numbers for the two prior months up by 114,000 jobs combined. More good news came from the household survey that indicated a drop in the unemployment rate by 0.1 to 7.5 percent. While this is a level that has not been seen since December 2008, there continues to be subdued optimism as the labor force participation rate held steady at 63.3 percent. With pre-recession levels above 66 percent participation, the market would like to see the unemployment rate continue to come down and the participation rate rise.

Earlier this week, in a new line added to its regular statement, the Federal Open Market Committee said it could move the rate of asset purchases up as well as down depending on what happens to prices and jobs. The committee had previously hinted that it might reduce its monthly purchases. This one additional line was enough to boost market confidence and equities rallied.

The economy, however, is far from surging. First quarter Real GDP growth of 2.5 percent was disappointing when compared to expectations of over three percent. Contraction in government spending of 4.1 percent was a big drag. Federal military spending fell by 11.5 percent, after falling 22.1 percent in the fourth quarter of last year, which is the deepest six-month decline in military spending since the 1950s. Nevertheless, as in prior months, it was not all bad news. Consumer spending expanded at a 3.2 percent rate, the fastest pace in over two years, and spending on services increased by 3.1 percent. With weekly jobless claims down to 324,000, the lowest since January 2008, and 70 percent of reported companies beating their earnings expectations as of April 25, the economy continues its slow, choppy and uneven growth. The ongoing soft patch will likely mean a renewed slowdown in the current quarter; however, the slowly strengthening feedback loops working through the labor and housing markets have helped stabilize spending and confidence and should, over time, support the economy in moving forward. All of these, coupled with the Fed's accommodating monetary policy give us reasons to believe that this slowdown will prove to be relatively shallow and short-lived compared to the soft patches in 2011 and 2012.

Last Updated 5/13/13
Last Updated 5/13/13