US Economic Perspectives Consumers “Coming Back” Faster Than Fed [UBS Investment Research] $SPY

Consumers “Coming Back” Faster Than Fed

Consumer comeback continuing
Consumer spending in early 2010 has been better than generally expected. Key reasons are improving household formation, lower debt service burdens, positive stock market wealth effects, a pickup in labor incomes, and some initial signs that the earlier consumer credit “freeze” is starting to “thaw” somewhat. These developments reinforce our outlook for 3% real growth in 2010 and 2011, with some upside risks.

Slow Fed
The FOMC statement reflected an even more gradualist Fed than we had expected. The FOMC held the Fed funds target range at 0-0.25% and repeated guidance that the policy rate would likely remain “exceptionally low … for an extended period.” The statement upgraded assessments of current conditions somewhat, with the labor market seen as “stabilizing.” And the statement noted an important milestone: asset purchases will be ended “by the end of the month.” Still, the Fed is moving only very slowly toward unwinding policy accommodation.

The past week
Manufacturing was stronger than expected in February, and the uptrend continued into March. Housing data were mixed, with less weakness than expected in February housing starts but falling builder confidence in March. So far in Q1, data suggest upside risk to our forecast that real GDP increases at a 2.5% annual rate.

The week ahead
Several Fed officials will make appearances in the upcoming week, including a rescheduled testimony from the chairman on “Federal Reserve’s exit strategy.” We expect home sales remained weak in February, although sales in the coming months are likely to get a boost ahead of the April 30 deadline for the homebuyer tax credit. The FHFA home price index probably fell again, consistent with other house price data already reported for January. Q4 GDP will probably be revised down a bit, to about a still-robust 5.6% pace. Durable goods orders likely continued to rise in February, and the University of Michigan consumer sentiment index probably edged up in late March.


US Economic Perspectives