U.S. economic data from first week of March was generally positive and consistent with an ongoing expansion through the first quarter of the year.
The impressive February jobs numbers focused attention back on the Federal Reserve. Despite bad weather, 295,000 payroll jobs were added on net in February. The unemployment rate fell from 5.7 percent in January to 5.5 percent in February, and remains on track to end this year at or below 5.0 percent. Over the previous 12 months, average hourly earnings for all workers are up a modest 2.0 percent, but consumer price inflation is weak at -0.1 percent over the year ending in January. We expect to see more wage inflation through the second half of this year as labor markets tighten up.
The strong February jobs report sets the stage for the Federal Reserve to take yet another step toward monetary policy normalization at the upcoming March 17-18 FOMC meeting. We expect the Fed to modify their forward guidance on interest rates by removing the word “patient” from their analysis. This small change will reinforce market expectations of interest rate lift-off this year. We continue to expect to see a small increase in the fed funds rate announced on June 17, with September 17 a reasonable second choice.
The U.S. international trade gap narrowed in January to $41.8 billion. That sounds good, but it was not a particularly robust report. The trade figures are muddied by the drop in oil prices and by the now-resolved labor issues on California docks. Imports dropped by $9.4 billion for the month. Exports dropped by less, $5.6 billion, so the net balance of trade improved. It is too early to say with conviction, but trade is starting out Q1 as a net drag on GDP.
Initial claims for unemployment insurance increased by 7,000 for the week ending February 28, to hit 320,000. Initial claims have trended up since mid-January, but remain within the favorable range that was established through most of 2014. Continuing claims gained 17,000, to hit 2,421,000 for the week ending February 21, still a good number.
Nonfarm productivity declined at a 2.2 percent annual rate in 2014Q4, reflecting softer GDP growth in the quarter, accompanied by strong job gains. We expect robust job gains to moderate through 2015, bringing productivity growth back into the black. Conversely, unit labor costs increased at a 4.1 percent annual rate in 2014Q4. Over the previous year, unit labor costs are up 2.6 percent on average.
The ISM Manufacturing Index slipped to a still-positive 52.9 in February. The ISM Non-Manufacturing Index increased to a solid 56.9 for the month.
Bad weather is blamed for weaker-than-expected U.S. auto sales in February, chilling to a 16.2 million unit sales rate. Strong job growth supports a March rebound.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 03-06-15.