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Weekly Economic Commentary


Minutes of December 2011 FOMC Meeting - Fed Will Publish Forecast of Fed Funds Rate

January 3, 2012

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The highlight of the minutes of the December 13 FOMC meeting is that the Fed plans to publish its forecast of the path of the federal funds rate. The Fed will include in its economic projection the federal funds rate for the fourth quarter of 2012 and “next few calendar years.” The likely timing of the first increase in the fed funds rate will also be available as part of the January 24-25, 2012 projections. The Fed’s communiqué in January will include explanations of the “key factors underlying those assessments as well as qualitative information regarding participants’ expectations for the Fed’s balance sheet.”

The FOMC expects the economy to expand at a moderate rate in the quarters ahead with a gradual decline of the unemployment rate from the current level of 8.6%. The ramifications from the debt crisis in the eurozone, fiscal tightening in the US, household deleveraging and strains in the global financial markets were seen as factors that may restrain economic activity. Inflation is predicted to hover around levels consistent with the longer-run mandate-consistent rate.

Going forward, it would be an interesting exercise to include the Fed as one of the members of the Blue Chip survey panel now that they plan to publish a Fed funds forecast. Although the Blue Chip survey includes the 3-month Treasury bill rate among the indicators participants predict, a proxy based on the Fed’s funds rate forecast can be constructed for the horse race.

US Factory Activity Data Suggest Continued Forward Momentum

The U.S. ISM manufacturing survey indicates a growing factory sector in December. The US Purchasing Managers’ Index (PMI) rose to 53.9 in December from 52.7 in the prior month. The December mark is the highest since April 2011. Readings above 50 denote an expansion in activity. Indexes tracking new orders, production, employment, and export orders advanced in December. The bottom line is that the December survey results point to a continued improvement of factory activity after a lull in the summer months.

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DEC 010312 1b

Factory conditions across the world posted improvements in December. Factory activity grew during December in China and Japan after registering a contraction in November. The eurozone factory sector continues to show a decline in activity; the good news is that the pace of contraction was slower in December compared with November.

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Source: http://blogs.wsj.com/economics/2012/01/03/world-wide-factory-activity-by-country-21/

Residential Construction Spending Likely to Make Positive Contribution to Q4 GDP

Total construction spending rose 1.2% in November, reflecting a 2.0% increase in residential construction spending, a steady reading for non-residential construction spending, and a 1.7% increase in public construction outlays. The fourth consecutive monthly increase in residential construction expenditures is noteworthy.

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The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.