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GDP estimate shows broad-based strength with 3.5% gain

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WASHINGTON (10/31/14)--Seasonally adjusted annualized real gross domestic product (GDP) growth fell in the third quarter by 1.1% to 3.5%, according to an early estimate by the U.S. Department of Commerce.
 
The Bureau of Economic Analysis report released Thursday showed that the decline was largely attributed to decreased spending on inventories, which held back overall economic growth by 0.57%.

Decelerations of growth in fixed investment also contributed to the slowdown. Residential investment in the third quarter fell to 1.8% from 8.8% while nonresidential investment dropped to 5.5% from 9.7%.
 
The data does indicate, however, that the economic recovery is gaining momentum. Moody's analysts said that economic growth is "above trend" at almost 3%. In four of the last five quarters, real GDP has grown more than 3%, with recent broad-based monthly job gains averaging almost 225,000 ( Economy.com Oct. 30). The ratings and research firm also noted that job openings have significantly increased since the start of year.
 
Contributing to growth in the third quarter were net-exports and government spending. The former, at 1.3%, was driven by a decrease in spending on imports, which fell by 1.7% after an 11.3% increase in the second quarter. The latter grew by 10%, up from 0.9% in the second quarter--pushed higher by a 16% increase in defense spending.
 
Moody's analysts said that government spending made its largest contribution to growth since 2009, potentially leading to higher numbers than expected. The Wall Street Journal had predicted that real GDP would increase in the third quarter by 3.1% (Oct. 30).
 
Almost mirroring the drop in real GDP growth was a fall in real disposable income. It fell from 2.7% to 4.4% despite a decrease in inflation growth to 1.2% from 2.3%.
 
The savings rate rose slightly by 0.1% to 5.4% while growth in real personal consumption expenditures fell to 1.8% from 2.5%.
 
The preliminary reading could be revised down when the BEA's second report on the third-quarter, based on more complete data, comes out Nov. 25. The Wall Street Journal pointed out that many Americans are barely seeing wage increases keep pace with inflation since the recession wiped out much of their wealth. The paper also noted that the Federal Reserve announced Wednesday that its quantitative easing program has been terminated. Economists, the Journal stated, could similarly dampen their outlook with economic woes in Europe and East Asia.

Post QE, Fed concerns still linger, says CUNA's Schenk

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WASHINGTON (10/30/14)--Given that the Federal Open Market Committee (FOMC) said in the middle of 2013 that it was planning to retire its asset-purchase program, it was no surprise Wednesday when, at the conclusion of its two-day monetary policy meeting, the FOMC announced the program's official end.

Therefore, neither the announcement nor the actual termination of the quantitative easing program should have an effect on markets or the economy, according to Mike Schenk, vice president of economic and statistics for the Credit Union National Association.

"The fact that the economy has been growing and labor markets have been improving over most of the wind-down period is a good sign," Schenk told News Now.

But with the bond-buying program now a thing of the past, the Federal Reserve's monetary-policy making body must turn its attention to the short-term interest rates that it has kept near 0% for the past few years to help stimulate the economy.

As the FOMC said in its policy statement that it does not anticipate it will raise short-term rates for a "considerable time" after the end of the purchase program, and potentially not even for some time after inflation and unemployment reach levels that align with the committee's longer-run goals, it seems there's concern among the Fed about the prospects for the economy.  

"The breadth of labor market recovery is not what the Fed would like it to be," Schenk said. "Wage gains have been fairly weak, and the housing market is recovering, but not robustly. That in addition to a weak Eurozone and obvious geopolitical uncertainties.

"With this as a backdrop, it's not surprising the Fed also stated its intention to keep its short-term interest rate target near zero for an extended period," Schenk said. "The Fed funds futures market reflects expectations of a first Fed move at a July 2015 FOMC meeting.

"In the meantime we expect labor and housing markets to continue to improve, and that should translate into continued high loan demand at credit unions in the coming months."

NEW: QE in rearview mirror, rate hike miles off: FOMC

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WASHINGTON (10/29/14, UPDATED 2:25 p.m. ET)--As expected, the Federal Open Market Committee (FOMC) announced at the end of its two-day policy meeting today that it will not purchase bonds next month for the first time in more than three years.

The Federal Reserve's monetary policy-making body believes that the economy has strengthened enough that it no longer needs that accommodative policy tool, which has injected more than $1.6 trillion into the lending market since the practice began.

"The committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability," the Fed said in its statement. "Accordingly, the committee decided to conclude its asset purchase program this month."

But as the economy has gained steam in recent months, bolstered by solid job gains, a lower unemployment rate, moderately rising household spending and advances in business fixed investment, the FOMC still contends that because of sluggish inflation, in addition to a slow recovery in the housing market, it will wait a "considerable time" before raising short-term interest rates.

The Fed has kept interest rates pinned near 0% in recent years to lower the cost of lending nationwide.

"It likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset-purchase program this month, especially if projected inflation continues to run below the committee's 2% longer run goal, and provided that longer-term inflation expectations remain well anchored," the FOMC said.

Further, even after inflation rises to the levels that the FOMC would like to see, the Fed said that it anticipates it will have to hold rates below levels it deems normal in the longer run for some time.

The FOMC's next policy meeting falls on Dec. 16-17.

Consumer confidence hits 7-year high

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WASHINGTON (10/29/14)--After September's pullback, the Conference Board Consumer Confidence Index blew past expectations and climbed 5.5 points in October to 94.5, a seven-year high (Economy.com Oct. 28).

Sentiments over current and future economic conditions improved, according to the index, driven in large part by a brighter outlook from buyers.

"The Conference Board survey is more labor-market heavy than most, and the recent rise probably indicates stronger job growth in better-paying fields is lifting buyers' spirits," said Nate Kelley, Moody's analyst (Economy.com).

The number of respondents who believe business conditions will improve over the next six months climbed to 19.6% from 19%, and the share of those who believe conditions will worsen over that stretch fell to 9.3% from 11.4%.

The majority (71.1%) believe, however, that conditions will stay the status quo.

Further, 16.8% of consumers believe more jobs will be available in the next six months, a 0.8% increase, and 13.9% believe that there will be fewer, down 3% from the prior month.

"Looking ahead, consumers have regained confidence in the short-term outlook for the economy and labor market, and are more optimistic about their future earnings potential," said Lynn Franco, director of economic indicators for The Conference Board (MarketWatch Oct. 28). "With the holiday season around the corner, this boost in confidence should be a welcome sign for retailers."

The rosier consumer sentiment doesn't appear to be translating into stronger spending just yet.

Only 10.8% of respondents said they plan to purchase a car in the next six months, a 1.3% drop from September and the lowest reading since the spring.

The share of those who plan to buy a home stood pat at 5.1%, while 49.1% plan to buy a major appliance, nearly a 2.5% decline.

Fed meeting preview: FOMC to wave goodbye to QE

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WASHINGTON (10/29/14)--At the end of the Federal Open Market Committee's (FOMC) two-day monetary policy meeting today, the Federal Reserve likely will announce it has purchased its final round of bonds, thereby closing the book on quantitative easing, the policy tool it has used for the last three years to stimulate the lending market and the economy.

Over that time, the Fed has purchased $1.6 trillion in Treasuries and mortgage-backed securities, amassing a hefty balance sheet that at some point it must begin to unload (MarketWatch Oct. 28).

The other major decision the FOMC must make in the coming months is when it will begin raising short-term interest rates, as employment has climbed to levels at which the Fed has said it would like to see before raising rates.

Though, with stumbling inflation--the other indicator the Fed says it will rely on when making this decision--a change in forward guidance at the end of today's meeting appears unlikely.

Many expect the FOMC to once again state that it will wait a considerable time to hike short-term rates (MarketWatch).

"The Fed has little appetite for minor tweaking of language," Michael Gregory, chief economist at BMO Capital Markets, told MarketWatch.

The vague wording could instill confidence in investors and help avoid destabilizing the market, while at the same time leaving the door open for a number of next steps for the FOMC depending on what happens to inflation.

The FOMC likely also will state today that it will take action if inflation remains below 2%, Paul Edelstein, director of U.S. financial economics at HIS Global Insight, told MarketWatch.

Despite growing fears that inflation will continue to stumble, however, there doesn't appear to be much support for extending quantitative easing into December.

Fannie Mae pays $170M to clear subprime suit

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WASHINGTON (10/28/14)--Fannie Mae will pay $170 million to shareholders to settle a consolidated class action lawsuit alleging the government-backed lending agency failed to represent the full extent of its exposure to subprime loans that played a large role in causing the housing crisis, according to documents filed in New York federal court last week ( Law360.com Oct. 24).

The common and preferred stockholders who filed the complaint filed a motion of preliminary approval of the settlement Friday. The agreement would clear Fannie Mae, in addition to Federal Housing Finance Agency officials, of allegations that it had broken the Securities Exchange Act of 1934, according to Law360 .

Nearly three-quarters of the settlement amount will go to the Massachusetts Pension Reserve Management Board and State Boston Retirement Board, which represent the common stockholders, and about 25% will go to the Tennessee Consolidated Retirement System, which represents the preferred stockholders.

The plaintiffs have released a statement that they are pleased with the settlement, especially after a similar complaint against Freddie Mac was recently dismissed.

"Unlike the plaintiffs in the Freddie Mac case, we were able to successfully allege that investors' losses were caused by Fannie Mae's statements and actions rather than by the financial crisis," said Daniel J. Greene, board chair of the State Boston Retirement Board ( Law360.com ). "The Boston retirement system believes it's important to prosecute securities class action cases such as this one in order to protect the assets that it holds for its members and retirees."

Pending-home sales tick up in Sept. after Aug. decline

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WASHINGTON (10/28/14)--Pending-home sales inched up in September after a modest step back in August, according to numbers released by the National Association of Realtors Monday.

Seasonally adjusted, home sales rose by 0.3% to 105 million annualized units, only partially offsetting August's 1.1% decline ( Economy.com Oct. 27).

While analysts had been expecting a sizeable 2% jump, sales have improved from levels at this time last year.
The pending home sales index came in "somewhat less than expected, but remains on its upward trajectory begun in early 2014," said Brent Campbell, Moody's analyst ( Economy.com ).

"Other housing indicators (such as new-home sales) are pointing to a modest recovery in homebuyer demand" as well, Campbell said.

The increase in pending sales, described by Moody's as a leading indicator of the housing market, was not uniform throughout the United States, however.

Sales increased in the Northeast and South at 1.2% and 1.4% respectively, but in the West and Midwest, sales dropped by 0.8% and 1.2%.

Year-over-year, the West region saw the greatest climb in pending-home sales, up 3.6% in September. The Northeast and South also posted year-over-year increases, while the Midwest was the only region to record a drop, at 4%.