Comerica Economic Weekly

U.S. economic data showed mixed trends in housing and ongoing improvement in the manufacturing sector. The biggest economic news came from financial markets with some profit taking in stocks on Tuesday and from Washington where political power struggles are challenging healthcare reform.

The stall in healthcare reform suggests there is some downside risk to the pro-growth Trump Administration agenda. Healthcare impacts the budget. The budget impacts tax reform. Tax reform impacts trade policy. All the above impact the Administration’s ability to pull off a major infrastructure program.

Existing home sales fell in February by 3.7 percent to hit a 5,480,000 unit annual rate. With weaker sales, very tight inventories increased a bit, to a still tight 3.8 months’ worth. The median sales price was up 7.7 percent in February over the previous 12 months.

New home sales were better than expected in February, increasing by 6.1 percent to a 592,000 unit annual rate in a continuation of the upward trend in new home sales that began in 2011.

Initial claims for unemployment insurance for the week ending March 18 increased by 15,000, to hit 258,000, which is still a very low number. Continuing claims for the week ending March 11 fell by 39,000, to hit an even two million. Continuing claims look like they are levelling out near the late-cycle lows of 1988 and 2000.

New orders for durable goods increased by 1.7 percent in February after a 2.3 percent gain in January. Commercial aircraft orders were strong in both months. The core measure, nondefense capital goods excluding aircraft, was little changed in January and February.

U.S. and global economic fundamentals continue to look good, which should provide a floor for downward momentum in stocks.

Oversupply in the U.S. and globally is putting downward pressure on oil prices. WTI crude oil fell from over $53 per barrel in early March to about $49 in mid-March, and fell again to $47.50 at mid-week. Lower oil prices reduce inflationary pressure, suggesting marginal downside potential for Fed rate hikes.

We believe that the Fed still needs to set expectations for the second half of the year. Those expectations will be shaped in part by oil and politics.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_ 03242017.

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February New and Existing Home Sales, March UI Claims

New Home Sales Strong in February

  • New Home Sales increased by 6.1 percent to a 592,000 unit annual rate.
  • Existing Home Sales fell by 3.7 percent in February to a 5,480,000 unit annual rate.
  • Initial Claims for Unemployment Insurance gained 15,000 for the week ending March 18, to hit 258,000.

Tight supply, higher prices and high mortgage rates are constraining the market for existing homes and fostering strong demand for new homes. Mortgage rates ticked up at the end of December, consistent with expectations of tighter Federal Reserve monetary policy this year. The Fed raised the fed funds rate range on March 15 by 25 basis points to 0.75-to-1.00 percent. According to the Freddie Mac mortgage market survey, the commitment rate on a 30-year fixed-rate mortgage increased again for the week of March 16, to 4.30 percent, and then eased to 4.23 percent for the week of March 23.

Existing home sales fell in February by 3.7 percent to hit a 5,480,000 unit annual rate. Sales fell most in the Northeast, down 13.8 percent for the month. The Midwest was down 7 percent. The West lost 3.1 percent while sales in the South increased by 1.3 percent. With weaker sales, very tight inventories increased a bit, to a still tight 3.8 months of supply at the February sales rate. The median sales price of an existing home was up 7.7 percent in February over the previous 12 months according to the National Association of Realtors.

New home sales were better than expected in February, increasing by 6.1 percent to a 592,000 unit annual rate. This is the second best monthly sales figure since the end of the Great Recession. It shows a continuation of the upward trend in new home sales that began in 2011. New home sales in the Northeast dropped by 21.4 percent in February. However, the Midwest saw a 30.9 percent increase. The West gained 7.5 percent and the South was up 3.6 percent. The months’ supply of available new homes for purchase decreased marginally to 5.4 months’ worth. The median sale price of a new home was down by 4.9 percent in February from 12 months earlier. This does not reflect weakness in the market. Rather, it shows a shift toward more affordable homes by builders and it also reflects the changing geographic mix of homes sold.

Initial claims for unemployment insurance for the week ending March 18 increased by 15,000, to hit 258,000, which is still a very low number. Continuing claims for the week ending March 11 fell by 39,000, to hit an even 2 million. Continuing claims look like they are leveling out near the late-cycle lows of 1988 and 2000.

Market Reaction: U.S. equity markets opened with gains. The 10-year Treasury bond yield is up to 2.41 percent. NYMEX crude oil is down to $47.85/barrel. Natural gas futures are up to $3.10/mmbtu.

For a PDF version of this Comerica Economic Alert click here: New_Home_Sales_0323017.

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From the Desk of Robert Dye

Along with the highly anticipated monetary policy statement of March 15, when the Federal Reserve announced that they were increasing interest rates for the third time in this tightening cycle, the Federal Open Market Committee also issued an updated “dot plot” and updated economic projections. Both the dot plot and the economic projections were little changed from December when they were judged to be consistent with three fed funds rate hikes in 2017. So the Fed wants us to expect two more rate hikes before the end of this year. However, with the March 15 rate hike, the Fed established the pacing of one 25 basis point rate hike every other meeting, occurring on meetings when there are scheduled press conferences. The Fed is not bound to that pacing, but that is what financial markets now expect them to do. The implied odds of a rate hike happening at the conclusion of the next Federal Open Market Committee meeting on May 3 are very low, at about 6 percent according to today’s fed funds futures market. The odds of the next rate hike, coming with the every-other-meeting pacing, that is on June 14, are reasonably high already at about 58 percent.

Given that financial markets are leaning toward a June rate hike, what then comes next? There are four more FOMC meetings after June: July 25-26, September 19-20, October 31-November 1 and December 12-13. The Fed has two obvious choices with this schedule: either (1) change the pattern of every-other-meeting rate hikes, or (2) have more rate hikes. We assume that the Fed has left the second half of 2017 ambiguous because of the uncertainty associated with Trump Administration fiscal policy. If it looks like the Trump Administration is making good progress toward real economy stimulus through tax reform, budget initiatives, regulatory rollback and/or infrastructure programs, we could expect the Fed to maintain the every-other-meeting pacing of interest rate hikes through the second half of the year, for a total of four rate hikes this year. Conversely, a stalled out Trump Administration means the Fed could reset pacing and only initiate one rate hike in the second half of the year. We expect the Fed to clarify the pacing for the second half of the year before they go into their media black-out period in early June, prior to the June 13-14 FOMC meeting, otherwise financial markets could react adversely to the increasing uncertainty about Fed policy.

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Comerica Economic Weekly

It was a busy week. A plethora of U.S. economic data was released. The Federal Reserve increased the fed funds rate and other central banks made policy announcements. Politics happened on both sides of the Atlantic. Even with all that, the U.S. economic story has not changed much. We still expect to see a stronger U.S. economy this year. There is still fiscal policy uncertainty. The Fed is still tightening.

The National Federation of Independent Business’s Small Business Optimism Index for February remained elevated, showing that the post-election surge in small business optimism was no fluke.

The Conference Board’s Leading Economic Index increased by 0.6 percent in February. Gains were broad-based.

Retail sales for February were weak, as expected, gaining just 0.1 percent. We knew that retail sales of automobiles would be close to neutral as unit auto sales were little changed at a 17.6 million unit rate in February.

Housing starts increased in February, propelled by a strong 6.5 percent increase in single-family starts to an 872,000 unit annual rate. This is the strongest single-family construction rate since October 2007. Permits for new residential construction eased by 6.2 percent in February, weighed down by a drop in multifamily permits. According to the National Association of Home Builders, builder confidence jumped to a 12-year high in March.

Initial claims for unemployment insurance dipped by 2,000 for the week ending March 11, to hit 241,000. Continuing claims fell by 30,000 to hit 2,030,000 for theweek ending March 4. These are very good numbers indicating tight labor market conditions.

The Job Openings and Labor Turnover Survey for January also showed ongoing strength in the labor market. The rate of job openings was unchanged in January at 3.7 percent.

Overall consumer prices increased by 0.1 percent in February, a little more than expected given the small drop in energy prices. Over the 12 months ending in February, the headline CPI was up by 2.7 percent. The year-over-year growth rate is elevated primarily as a result of the very weak oil prices this time last year.

The Producer Price Index for Final Demand increased by a strong 0.3 percent in February. Over the last 12 months core PPI is up 1.8 percent, while the headline PPI has gained 2.2 percent.

Business inventories increased by 0.3 percent in January, suggesting that inventories will provide support to headline GDP for the first quarter of 2017.

Industrial production was unchanged in February after dipping slightly in January. Warm weather reduced utility output for the second month in a row.

The New York Fed’s Empire State Manufacturing Survey ticked down slightly, but showed ongoing improvement in area manufacturing conditions in March. The Philadelphia Fed’s Manufacturing Business Outlook Survey also showed a modest dip to a still-strong level.

President Trump unveiled his “skinny” budget proposal. Congress has a lot of work to do on that and on healthcare. The Dutch kept Prime Minister Mark Rutte’s center-right party in power.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_ 03172017.

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Feb. Residential Construction, March UI Claims and Philly Fed, Jan. JOLTS

Grab Bag of Data Consistent with Ongoing Economic Momentum

  • Housing Starts increased in February by 3.0 percent to a 1,288,000 unit annual rate.
  • Permits for new residential construction decreased by 6.2 percent to a 1,213,000 unit pace in February.
  • Initial Claims for Unemployment Insurance fell by 2,000 for the week ending March 11, to hit 241,000.
  • The Job Openings Rate was unchanged in January, at 3.7 percent.

Housing starts increased in February, propelled by a strong 6.5 percent increase in single-family starts to an 872,000 unit annual rate. This is the strongest single-family construction rate since October 2007. The market for new single-family houses remains strong, shown by the jump in the March survey by the National Association of Home Builders. Multifamily is a different story. Multifamily starts dipped by 3.7 percent in February, to a 416,000 unit annual rate. This remains within the range established in early 2015. Absorption of new multifamily units has slowed in many markets as supply outpaced demand. The rate of apartment rent increases is easing after years of strong gains. Condo prices are flattening or declining in many markets. We view this as a short-to-medium-term phenomenon that will gradually abate as demand catches up. With the total volume of new housing units added still below the rate of household formation, fundamental demand remains strong. Also, the gentrification wave happening in many urbans areas is replacing an old unit with a new unit, so it is not resulting in a net increase in housing stock. So even with strong single- and multifamily starts in many cities, housing stock has not increased proportionately, keeping supply tight, especially for single-family units. Permits for new residential construction eased by 6.2 percent in February, weighed down by a drop in multifamily permits.

Initial claims for unemployment insurance dipped by 2,000 for the week ending March 11, to hit 241,000. Continuing claims fell by 30,000 to hit 2,030,000 for the week ending March 4. These are very good numbers indicating tight labor market conditions. The Job Openings and Labor Turnover Survey for January shows ongoing strength in the labor market. The rate of job openings was unchanged in January at 3.7 percent. Hiring ticked up slightly to 3.7 percent of total employment. Separations ticked up to 3.6 percent.

The Federal Reserve Bank of Philadelphia’s Manufacturing Business Outlook Survey showed a modest dip to a still-strong level in the Current Activity Index for March, consistent with the similar survey from the New York Fed.

Market Reaction: Stock indexes are mixed. The yield on 10-Year Treasury bonds is up to 2.51 percent. NYMEX crude oil is down to $48.67/barrel. Natural gas futures are down to $3.02/mmbtu.

For a PDF version of this Comerica Economic Alert click here: Housing_Starts_031617.

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Federal Reserve Monetary Policy

Fed Raises Short-Term Interest Rates 25 Basis Points As Expected

  • The Federal Reserve raised the target range of the fed funds rate by 25 basis points.
  • The new Dot Plot remains consistent with three 25 basis point rate hikes in 2017 and 2018.

As widely expected, the Federal Open Market Committee voted today to increase the fed funds rate range by 25 basis points, to 0.75-to-1.00 percent. The tone of the monetary policy announcement was just slightly more hawkish than the February 1 announcement. According to the Fed, labor market conditions continue to strengthen and economic activity has continued to expand at a moderate pace. Today’s policy announcement specifically notes that business investment appears to have firmed somewhat. The FOMC is still comfortable with the expected pace of inflation, saying that it will stabilize around 2 percent over the medium term. The FOMC expects that economic conditions will warrant gradual increases in the fed funds rate, but that the fed funds rate will remain below the long-run average for some time. The Fed’s view on the timing of potential balance sheet operations remains unchanged. The Fed will continue to reinvest maturing assets until interest rate normalization is well under way. We expect balance sheet policy to remain as is through the end of this year. There was one dissenting vote on today’s policy action from Minneapolis Fed President Kashkari who would have preferred to leave the fed funds rate unchanged.

Also, the Fed released a new “dot plot” and new economic projections. These are both only slightly changed from the December dot plot and projections. The new dot plot remains consistent with a total of three 25 basis point fed funds rate hikes this year and next. In her post-announcement press conference, Janet Yellen stated that some FOMC officials have incorporated new fiscal policy assumptions in their individual outlooks, but that the complete fiscal picture remains undefined.

It is fair to say that the Yellen Fed remains somewhat tactical in their policy changes. By staying with their projections of three rate hikes this year and next, the Fed is maintaining flexibility around the exact timing of rate hikes. However, at the same time, the fed has now added weight to the precedent of one rate hike every other meeting. As of this writing, the implied odds of the next rate hike coming at the conclusion of the upcoming FOMC meeting on May 3 are quite low at 4.3 percent, according to the fed funds futures market. The odds of the next rate hike coming on June 14 jump to 48.5 percent. With June near even money, that leaves the timing of the third rate hike this year in question, adding to financial market uncertainty. So it looks like the Fed still has some work to do in setting market expectations for the second half of this year. Fed officials are likely waiting as long as possible for some clarity on fiscal policy before they cross that bridge. Nonetheless, they will need to clarify forward guidance soon.

Market Reaction: Equity prices increased on the news. There may have been some relief that the Fed did not commit to four rate hikes this year. The 10-year Treasury yield eased to 2.50 percent. NYMEX crude oil is up to $48.90/barrel. Natural gas futures are up to $3.03/mmbtu.

For a PDF version of this Comerica Economic Alert click here:  FOMC_03152017.

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Feb. Consumer Prices, Retail Sales, Jan. Biz. Inventories, March NAHB and NY Fed

Nothing in Today’s Data Stops the Fed from Announcing a Rate Hike This Afternoon

  • The February Consumer Price Index increased by 0.1 percent.
  • Core CPI increased by 0.2 percent, and was up 2.2 percent over the previous 12 months.
  • Retail Sales increased by a weak 0.1 percent in February.

Overall consumer prices increased by 0.1 percent in February, a little more than expected given the small drop in energy prices. Over the 12 months ending in February, the headline CPI was up by 2.7 percent. The year-over-year growth rate is elevated primarily as a result of the very weak oil prices this time last year. We expect the year-over-year change in the CPI to moderate through this summer as the energy price effect ends. The energy price index fell by 1.0 percent in February, but remains up by 15.2 percent over the previous 12 months. Consumer energy prices will also likely be a drag on headline CPI in March given the large drop in crude oil prices this month. The core CPI (all items less food and energy) increased by 0.2 percent in February, about as expected, supported by housing and transportation services (air fares).

Retail sales for February were weak, as expected, gaining just 0.1 percent. We knew that retail sales of automobiles would be close to neutral as unit auto sales were little changed at a 17.6 million unit rate in February. The dollar value of auto sales declined by 0.2 percent for the month. Gasoline stations also saw weaker sales, which we can blame on slightly lower gasoline prices. However, other categories of sales were also soft. Electronics and appliance store sales fell by 2.8 percent. Clothing store sales were down by 0.5 percent, likely hurt by warm weather. Sporting goods dipped by 0.4 percent. Income tax returns were light early in the return season and this is also a culprit in soft retail sales for February. We expect to see a mixed retail picture in March. Solid job gains plus strong consumer confidence are positives. Income tax returns are catching up to the normal pace so that should be a positive also. However, stagnant auto sales and lower gasoline prices will likely be negatives.

Business inventories increased by 0.3 percent in January, suggesting that inventories will provide support to headline GDP for the first quarter of 2017. The overall inventory-to-sales ratio is trending down, which is a good sign, after trending up through 2015. According to the National Association of Home Builders, builder confidence jumped to a 12-year high in March, adding support to our positive outlook for housing starts and new home sales. The survey tracks builder confidence for newly-built single-family homes. The Federal Reserve Bank of New York’s Empire State Manufacturing Survey ticked down slightly, but showed ongoing improvement in area manufacturing conditions in March.

We continue to place a very high probability on the likelihood of a fed funds rate hike this afternoon, to be announced at 1 p.m. Central Time. We expect the fed funds rate range to increase to 0.75-to-1.00 percent. We look forward to the new “dot plot” and economic projections of FOMC members, as well as the post-meeting press conference by FOMC chairwoman Janet Yellen.

Market Reaction: Equity markets opened with gains. The 10-Year Treasury bond yield is down to 2.57 percent. NYMEX crude oil is up to $48.43/barrel. Natural gas futures are up to $3.02/mmbtu.

For a PDF version of this Comerica Economic Alert click here: CPI_03152017.

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February PPI, Small Business Confidence

Data Consistent with Fed Rate Hike Expectations for Tomorrow

  • The Producer Price Index for Final Demand increased by 0.3 percent in February.
  • Core Producer Prices also increased by 0.3 percent.
  • The NFIB’s Small Business Optimism Index sustained its recent surge, easing slightly to 105.3 in February.

The Producer Price Index for Final Demand increased by a strong 0.3 percent in February after jumping by 0.6 percent in January. The ramp up in producer prices since the first of the year adds support for a fed funds rate increase by the Federal Open Market Committee at the conclusion of their two-day meeting, which began today. The push in February producer prices came both from goods, which gained 0.3 percent, and from services, which gained 0.4 percent for the month. Wholesale energy prices were up another 0.6 percent in February. We will see them dip when the March data is reported, reflecting the recent drop in crude oil prices to just below $48 per barrel. The gain in services prices was driven by traveler accommodation services (hotels). Over the last 12 months core PPI is up 1.8 percent, while the headline PPI has gained 2.2 percent. Year-over-year growth in headline PPI will continue to get support over the next few months from crude oil as long as current prices are maintained.

The National Federation of Independent Business’s Small Business Optimism Index for February showed that the post-election surge in small business optimism, which first registered in the December NFIB survey, was no fluke. For the third month in row, the NFIB’s Small Business Optimism Index has been above 105. The February reading eased slightly from 105.9 in January to 105.3. Stronger business optimism suggests that hiring, business investment plans and sales expectations are positive.

There is nothing in today’s U.S. economic data releases to suggest that the Federal Reserve will deviate from the widely expected 25 basis point fed funds rate hike tomorrow. It is going to be a very interesting week. In addition to the expected Fed announcement, we will see the results of the Dutch elections, President Trump will unveil his budget proposal, the Bank of England will release a policy statement as will the Bank of Japan. Also a spate of U.S. data will be released over the next few days that will help shape economic expectations at the end of the first quarter.

Market Reaction: U.S. equity markets fell at the opening. The yield on 10-Year Treasury bonds is down to 2.60 percent. NYMEX crude oil is down to $47.36/barrel. Natural gas futures are down to $3.02/mmbtu.

For a PDF version of this Comerica Economic Alert click here:  PPI _03142017.

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Fiscal Policy Uncertainty, Offsets, Scoring and Monetary Policy Inflections

Tax reform, trade policy, defense spending, deregulation, healthcare reform and infrastructure spending are all potential positives for the U.S. economy in 2017 and 2018. Until the Trump Administration unveils its plans through this spring and summer, and proves its ability to implement its plans, we will endure a high degree of policy uncertainty. Indeed, the Economic Policy Uncertainty Index, which was useful in tracking policy uncertainty during and immediately after the Great Recession, is again elevated. Policy uncertainty through the Great Recession was accompanied by a fear of how bad things could get. Now, elevated uncertainty is not associated with a fear of dropping into an abyss, so it is not paralyzing. Rather, it simply reflects the magnitude of the changes that the Trump Administration is attempting.

Many of the proposed policy changes are big economic levers that have the potential to move the U.S. economy in a positive direction in the short-term, and at the same time move the federal deficit in a negative direction over the long-term. According to the projections of the Congressional Budget Office, we were already facing a growing federal deficit before President Trump took office. Given the highly constrained federal budget deficit outlook, every Trump Administration policy proposal is accompanied by a discussion of budget offsets. In the case of the proposed 10 percent increase in federal defense spending, the offset would be similar reductions in federal nondefense discretionary spending in order for the plan to be deficit-neutral. The Congressional Budget Office is expected to release its review of the American Health Care Act this week. The CBO’s budget scoring will shape the political debate about the need for offsets due to the proposed changes in healthcare policy.

Another potential offset to proposed fiscal changes is the so-called “monetary offset.” The Federal Reserve now appears to be on the verge of another interest rate increase, expected to be announced on Wednesday, March 15. Given the strong jobs report for February, when 235,000 net new jobs were added to the U.S. economy, we see no roadblocks to the Fed’s third rate hike in this tightening cycle. The first came in December 2015, the second came a year later, in December 2016. Now just three months later Fed interest rate policy is at a new inflection point. We look for the Fed to raise the fed funds rate range by 25 basis points this week, and do it again at least two more times this year, accelerating from the once-a-year pace of 2015 and 2016. In addition to the monetary policy statement on March 15, the Fed will issue a new “dot plot.” It will be interesting to see if the implied trajectory of future rate hikes lifts with the new dot plot, compared to the previous dot plot released last December. We think there is a reasonable chance that the March dot plot will steepen slightly, implying four rate hikes this year instead of the currently expected three. Gradually climbing interest rates may prove to be an “offset” to Trump Administration fiscal initiatives, including the discussed, but not yet defined, trillion dollar infrastructure program.

As Fed policy hits a new inflection point, we see hints that other central banks may also be at inflection points in their policies. Last week Mario Draghi, President of the European Central Bank, suggested that ECB policy has turned the corner, away from more monetary easing and toward a discussion of the gradual removal of accommodation.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: US_Economic_Outlook_0317.

 

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Comerica Economic Weekly

A March 15 fed funds rate hike cleared the last hurdle this morning upon the release of a solid February employment report.

The official count of payroll jobs for February showed a net gain of 235,000, consistent with a variety of other strong labor market indicators. The household survey bounced back with 447,000 net new jobs, bringing the unemployment rate back down to 4.7 percent. Average hourly earnings were not as strong as we expected, increasing by 0.2 percent for the month, and 2.8 percent over the previous 12 months. The average workweek was unchanged at 34.4 hours.

Initial claims for unemployment insurance increased by 20,000 for the week ending March 4, to hit 243,000, still a good number. Continuing claims fell by 6,000 for the week ending February 25, to hit 2,058,000.

The U.S. international trade gap widened significantly in January to -$48.5 billion. Imports were up $5.3 billion while exports gained $1.1 billion. This is a negative for Q1 GDP, and may contribute to the continued pattern of weaker-than-expected Q1 GDP results.

Nonfarm labor productivity increased at a 1.3 percent annual rate in 2016Q4. On the one hand the modest gain is a function of strong hiring. On the other hand, it continues a long trend of weak productivity growth that constrains GDP growth.

We expect the Federal Reserve to announce a 25 basis point increase in the fed funds rate range on Wednesday, March 15.  The Fed will also release a new “dot plot” and economic projections on Wednesday, and Janet Yellen will have a press conference. With a fed funds rate hike next week a near certainty, the focus is now on forward guidance. If the Fed hikes on Wednesday they will have begun a pattern of raising interest rates every other meeting, and on meetings with scheduled press conferences.  So analysts will be looking for clues in the policy announcement, in the dot plot and in Janet Yellen’s answers to reporters’ questions about the pacing of interest rate hikes for the remainder of this year. The December 2016 dot plot was consistent with three rate hikes for 2017. We could see the March dot plot shift upward, to be consistent with four rate hikes in 2017. The minutes of the March 14/15 FOMC meeting should prove interesting when they are released on April 5.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_ 03102017.

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