Comerica Economic Weekly

Economic data from the end of 2013 support a cautiously optimistic view of 2014. The U.S. economy shows evidence of a continued virtuous cycle. House prices are still going up. Home builders picked up the pace late last year. Consumer confidence is climbing. Auto sales are solid. Job growth has been reasonable. Equity prices are climbing, feeding the nascent optimism.

Fiscal and monetary policy remains complex. The drag from the federal budget sequester has been reduced by the new budget deal while the Federal Reserve begins to withdraw monetary stimulus by dialing down its asset purchase program. International conditions are stable-to-improving.

Other policy levers are also complex. Healthcare is in transition. Healthcare spending represents about 17 percent of U.S. GDP, so the consequences of the rollout of the  Affordable Care Act are large. The increased burden on small businesses from the Affordable Care Act will likely be compounded by an increase in the federal minimum wage this year. California has already approved a $2 increase in the state minimum wage to be phased in over three years. Entitlement reform, tax reform and immigration reform all remain undone. 

Interest rates are low, but expected to rise moderately through the year. Re-leveraging in an environment of rising rates adds to default risk down the road, but that is not a story for 2014.

The ISM Manufacturing Index for December improved to a solidly expansive 57.0 percent. Most sub-indexes improved, including employment. The two inventory components are still contracting, providing an early warning of weak inventory accumulation in late 2013/early 2014.

Initial claims for unemployment insurance declined by 2,000 to hit 339,000 for the week ending December 28. Claims data has been volatile recently but remains consistent with ongoing job creation.

Construction spending increased by 1 percent in November. Publically-funded construction is easing, down 1.8 percent for the month. However, private residential and private nonresidential activity is warming up. Total private construction spending was up 2.2 percent for the month and 8.6 percent from a year earlier.

The Pending Home Sales Index ticked up by 0.2 percent in November, breaking a five-month slide. The Case-Shiller 20-City Composite House Price Index was up by 1.0 percent in October, and up 13.6 percent from a year earlier. According to the Mortgage Bankers Association, the rate on a 30-year fixed rate mortgage was 4.64 percent on December 20.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly010314.

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