It's Going to be a HUGE Week for US Economic Data

Eat Your Wheaties: After last week’s deluge of earnings and end of the week jitters over Ukraine, the focus this week returns to the economy. The preliminary reading of first quarter growth is likely to show that the severe winter weather slowed down economic progress. GDP likely increased at a pokey, annualized pace of 1.1 percent, a significant downshift from the fourth quarter reading of 2.6 percent. During 2013 (that is, measured from the fourth quarter of 2012 to the fourth quarter of 2013), real GDP increased 2.6 percent, after increasing 2 percent during 2012.

All is not lost! Economists are forecasting a much stronger pace in the second quarter and beyond, with growth expected to increase by 3 percent by the end of the year, boosted by an increase in consumer and corporate spending and the fading effect of the government’s reduction in spending.

On the consumer side, the big bump in retail sales in March along with an increase in the numbers of hours worked should allow consumer wallets to open. Meanwhile, orders for core capital goods, which are seen as a proxy for business spending plans, increased by a larger than expected 2.2 percent in March after falling 1.1 percent the prior month. Finally, while government spending is not expected to ratchet up, it should no longer be a drag on growth. The government sector contribution to GDP decreased 1.5 percent during 2013, compared with a decrease of 0.2 percent during 2012.

One caveat to the rosy outlook on growth is housing: reports on Existing and New Homes sales, along with the drop in mortgage lending, has temporarily put the housing recovery on ice. Many housing economists believe that with the weather returning to normal and mortgage rates settling at 4.5 percent, the housing recovery should regain its footing.

Given comments by Fed Chief Janet Yellen since the last Fed meeting, it is also likely that the central bank will err on the side of providing too much rather than too little monetary accommodation, which should also boost growth in the near term. Mid week, the Federal Reserve will conduct a two-day policy meeting, where it is likely to announce another $10 billion reduction in its monthly bond buying program to $45 billion and will keep short term interest rates at zero to a quarter of a percent.

While the economy is not yet operating at full potential, there is evidence that employment may be picking up some steam. The average of new jobless claims over the past month dropped to the lowest level since October 2007 in early April and despite the latest small rebound in claims, the trend indicates that businesses are firing fewer workers than at any time since the recession began. Additionally, in recent months, temporary employment, which has a history of leading to larger rises in the number of permanent hires, has increased. Analysts believe that the US economy created 220,000 jobs in April and that the unemployment rate should tick down to 6.6 percent.

As noted last week (“Are These Green Shoots for Real?”), there is anticipation that wage growth will continue to accelerate throughout the year. One reason that economists believe that your raise is coming is that companies can’t seem to squeeze more productivity out of workers. According to Capital Economics, “Over the past decade, productivity growth has averaged only 1.6 percent, down from 3.1 percent in the decade before that.”

In other words, when companies can't squeeze any more work out of their employees, they will finally succumb and pay up!