Market and economic update: U.S. consumer provides backbone of economic growth

Last week’s U.S. economic data put a softer spin on current activity than the strong employment report did to start the month. Retail sales slipped 0.8% in January and confidence indicators eased from their high levels. The National Federation of Independent Business Small Business Optimism Survey slipped to 97.9, and the preliminary University of Michigan Sentiment Index for February slipped 4.5 points to 93.6.

Economic activity may be slipping from the torrid pace in the third quarter; however, the strong trend for employment data and the relatively high levels for confidence indicate the U.S. consumer remains on solid footing and will continue to provide the backbone of economic growth.

Government spending is likely to contribute little to GDP growth this year, and net exports may slip a bit due to weaker data outside the United States. The solid jobs market and the lift to consumer confidence from lower oil prices should allow economic growth to reach our 2.5% target. Any lift from investments, either through capital spending or growth in the housing market, could lift GDP growth toward 3% for the year.

Data outside the United States have generally been weaker, with slower inflation and political risk from the elections in Greece. Negotiations with Greece remain at the forefront of investors’ minds as the new government seeks to negotiate for some relief from the country’s current debt obligations. In the meantime, eurozone economic growth seems stable, with the fourth quarter adding 0.3%, bringing 2014 growth to 0.9%, despite the drag from weak confidence and debt deleveraging.



Risks appear to remain skewed toward slowing growth, due to possible fundamental reform and the continued deleveraging across the banking system. Data from China indicate the economy continues to slow, with capital leaving the region, leading to a weaker currency relative to the U.S. dollar and attempts by the People’s Bank of China to ease monetary conditions. The fall in oil prices will provide some support to economic activity for oil-consuming regions, such as China, Japan, and Europe, but structural issues may mean global growth remains modest.

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Robert L. Haworth, CFA, is a senior investment strategist and Darrell Behnke is the Madison market leader for the Private Client Reserve of U.S. Bank.

This information represents the opinion of U.S. Bank and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. The organizations mentioned in this publication are not affiliates or associated with U.S. Bank in any way.

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