Yesterday’s update of the Federal Reserve’s quarterly economic forecast is a minor triumph for optimism. The central bank still expects that US GDP in 2015 will increase in the range of 2.6% to 3.0%, unchanged from its previous estimate in September. That’s a mild expansion, but it’s a step up from the Fed’s 2.3%-to-2.4% GDP outlook for this year. In a word, progress. Forecasting year-ahead GDP is subject to any number of risks, of course, and so it’s best to take the Fed’s prediction with a grain of salt. Yet it’s clear that the bank’s policymakers are becoming more confident that the US economic expansion will strengthen a bit in the year ahead. Events abroad may intervene and render the current outlook null and void, but based on what we know today the US macro trend is on track to start the new year with a moderately improving tailwind.
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● US, Cuba restore ties after 50 years | Reuters
● Experts on N. Korea see regime’s fingerprints on Sony attack | LA Times
● Putin’s Economic System Frays Further | Bloomberg
● North Sea oil industry ‘close to collapse’ | BBC
● Global life expectancy has ‘increased by 6 years since 1990’ | MNT
● German Business Confidence Rises With Growth Signs | BusinessWeek
● Swiss Central Bank to Adopt a Negative Interest Rate | NY Times
● British Retail Sales Growth Accelerates Unexpectedly | RTT
● Greece faces crisis on prospect of snap election | CNBC

The global economy is under pressure these days, suffering from a troubling mix of heightened geopolitical risk and wobbly macro reports. Despite the challenging environment, the US economy still looks resilient, based on the current numbers through November. Tracking a diversified set of indicators shows that macro momentum was solidly positive through last month. But at a time when the economic trend for the US appears to be strengthening, new threats are on the horizon. In addition to the familiar and long-simmering challenges facing Europe and Japan, a crisis may be brewing in emerging markets in the wake of sharply lower oil prices. As a result, blowback risk is rising for the developed world. The US isn’t immune to the turbulence, but the downside risks for the near term are limited due to the country’s positive macro momentum of late.
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● Bond Investors Are Skittish Over Emerging Markets | NY Times
● Three most important things to watch during Fed meeting | MarketWatch
● Memories of 1998 May Persuade Yellen’s Fed to Keep Rates Low | BusinessWeek
● Weakened Kremlin, plunging ruble create unpredictable Putin | Globe & Mail
● Eurozone Inflation Confirmed At 0.3% | RTT
● U.K. Aug-Oct Jobless Rate Falls Less Than Expected | RTT
● Greece Parliament Set For First Presidential Vote Wednesday | MNI

Today’s US economic releases – housing starts and business survey data for the manufacturing sector – suggest that the macro headwinds are increasing. It’s premature to dismiss the numbers du jour, but the previously released reports in recent weeks – payrolls, retail sales, and industrial production – offer a sharply positive counterpoint. For the moment, the big picture for the US still looks encouraging, albeit slightly tarnished relative to what we knew 24 hours earlier. But before we consider the reasoning for maintaining a positive outlook on the US economy, let’s briefly review the latest figures and then move on to considering if today’s news add up to a genuine warning for the business cycle.
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Mr. Market can be an emotional fellow at times, confusing and confounding the casual observer who tries to make sense out of market action that can appear nonsensical at times… right now, for instance. Indeed, the US stock market has been tumbling since its Dec. 5 peak – a slide that’s unfolded amid an impressive run of US economic releases – the best, arguably, in several years. What gives? Judging by Mr. Market’s reaction of late, there’s danger on the horizon for the economy. The hard data, however, suggests otherwise. What the heck’s going on? Is Mr. Market off his meds again? Or is there some logic buried in the current macro-market mashup?
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● Eurozone PMI: a slight improvement for weak growth in Dec | Markit
● China PMI: Dec mfg activity shrinks for first time since May | Markit
● Japan PMI: Slow mfg growth continues in Dec | Markit
● German PMI: Private sector activity growth weakest in 18 months in Dec | Markit
● French PMI: Private sector output falls at slowest rate in 4 months | Markit
● UK Inflation Slows to Least Since 2002 as Oil Prices Drop | Bloomberg
● Russia makes drastic rate rise to 17% to stem rouble decline | BBC
● US Industrial Production Surges in Nov | CapSpec
● US home builder confidence eases slightly in Dec | NAHB

Housing starts are expected to increase to an annual pace of 1.030 million in tomorrow’s update for November, according to The Capital Spectator’s median point forecast for several econometric estimates. The projection represents a moderate improvement over October’s 1.009 million units.
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Industrial output increased sharply in November vs. the previous month, rising at a rate that beat expectations by a wide margin (+1.3% vs. Econoday.com’s consensus forecast of +0.7%) . This morning’s monthly release strengthens the case for expecting that the Federal Reserve will begin raising interest rates next year, perhaps sooner than the mid-2015 forecast that’s been widely cited in recent weeks. Meantime, today’s numbers clearly show that the US economy so far appears to be immune to the economic slowdown that’s weighing on China and the stagnation that continues to afflict the Eurozone. Today’s bullish report on industrial activity follows surprisingly strong November numbers on retail sales and payrolls for the US.
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The Federal Reserve’s policy statement and updated economic forecast due out on Wednesday will be closely read in the wake of last week’s volatile market action – the US stock market suffered its worst week in several years while crude oil tumbled to a five-year low. The US economy, however, continues to deliver encouraging news, based on last week’s updates. Notably, the mid-December reading of the Reuters/University of Michigan’s measure of consumer sentiment rose to its highest reading since January 2007. Meanwhile, retail sales posted a sharply higher-than-expected increase in November. We also learned from the US Labor Department that job openings inched higher in October, close to a 14-year high. The upbeat run of numbers is expected to continue this week with today’s release on industrial production and tomorrow’s report on housing starts. No wonder that analysts continue to project that the Fed will start raising interest rates next year, perhaps midway in 2015, as many economists predict.
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