February 2014, Comerica U.S. Economic Update

The Outlook for 2014 is Positive, But There Will Be Bumps

We provide a grade of our economic outlook as a high-level assessment of our near-term expectations for the U.S. economy. A “C” rated outlook is consistent with a moderate real GDP expansion of around 2 percent on an annualized basis. A “B” economy would have around 3 percent real GDP growth. An “A” economy would show 4 percent or higher real GDP growth. Lets put a “D” in the range of –1 to 1 percent real GDP growth, and an “F” below  –1 percent. So our current C+ rating conveys our view that the U.S. economy is growing at a moderate rate and is likely to improve through this year.

Would that it could be that simple. We know that we had an unsustainable boost from inventories in the second half of 2013 (see page 2 for a discussion). We know that there will be a downside correction from that abnormally high rate of inventory growth. What we do not know is the exact timing and pattern of the coming correction. Inventories are a big lever on GDP, and we have to make assumptions about how that lever works. So we have assumed that there will be at least a partial inventory correction in the current quarter and that will bring 2014Q1 real GDP growth down to a measly 1.0 percent. We keep our C+ rating on the economy to reflect improving fundamental conditions even through the coming inventory correction.

Another major source of uncertainty for the U.S. economy comes from recent jobs data. Payroll employment expanded by 113,000 jobs in January, below expectations. This follows on the heels of a weak December report, when only 75,000 jobs were added. Both December and January payroll job growth was well below the 2013 monthly average of 194,000 net new jobs per month. It appears that a combination of bad weather and after-effects from last October’s federal government shutdown is muddying the data stream. We expect to see a little over 180,000 payroll jobs added per month in 2014 on average. Implicit in that assumption is a quick rebound in the jobs data for February, or at the very latest, for March. Other labor data, besides the official BLS numbers, show stronger metrics consistent with our C+ rating on the economic outlook for 2014.

The unemployment rate fell to 6.6 percent in January, just above the Federal Reserve’s 6.5 percent “threshold” for raising the fed funds rate. At this point, the Fed’s concept of an unemployment rate threshold has outlived its value as a forward guidance tool. We expect the Yellen Fed to maintain its near-zero fed funds rate policy well into 2015. The next meeting of the FOMC is March 18/19. So they will also have the February employment data, due out March 7, as well as other data, to look at before they deliberate on additional tapering of QE. As long as the February data is consistent with moderate expansion, the FOMC will continue to taper QE in $10 billion increments, dialing it down to zero by the end of this year.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate0214.

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