Mother nature is dominating the economic headlines as yet another winter storm pounded the South Atlantic and Mid-Atlantic regions this week. The majority of the economic data that we discuss here is seasonally adjusted. That means that normal seasonal weather changes are accounted for. However, this winter, the weather has been much worse than normal for large areas of the country, including the Midwest and the East Coast, home to much of the U.S. population. Many national-level economic data series are being negatively impacted by the abnormal weather this winter season.
Other short-term negatives for the U.S. economy include the recent perturbations in equity markets that were reinforced by concerns with some small emerging economies. Dialing down QE may add to equity market volatility. Also, the strong run-up in inventories that we saw in the second half of 2013 cannot last and will likely result in an inventory correction in 2014.
Longer-term positives remain in place. House prices are on an upward course, supporting consumer spending. Major global economies are reinforcing each other in a synchronized global expansion. The two-year federal budget deal means less fiscal drag in 2014. Also, the political debate about the impending debt-limit has been resolved with no economic drag. Energy remains a fundamental positive story for the U.S. economy.
The Yellen Fed is stressing continuity and predictability in its early days. We expect ongoing tapering of QE this year in $10 billion increments unless economic data fail to renormalize after the big freeze out. Also, the Fed is de-emphasizing the 6.5 percent unemployment rate threshold for fed funds rate policy. We expect to cross through the unemployment threshold in the second quarter, while we maintain our view the first increase in the fed funds rate will come around mid-2015.
Industrial production for January dipped by 0.3 percent. Utility output surged by 4.1 percent but that was overwhelmed by a 0.8 percent decline in the larger manufacturing sector. Auto assemblies declined by seven percent in January.
Retail sales fell by 0.4 percent in January. Weak auto sales were a key component. Unit auto sales fell from an already subdued 15.4 million unit pace in December to 15.2 million in January. The dollar value of retail sales for autos and parts declined by 2.1 percent in January. Building materials and supplies sales were the positive standout for January, up 1.4 percent….salt and snow shovels.
Initial claims for unemployment insurance increased by 8,000 to hit 339,000 for the week ending February 8. Initial claims have been erratic this winter, but it does look like the trend has leveled out in recent weeks after declining through the first half of 2013. Continuing claims increased late last year but now appear to be declining. The rollback of extended unemployment benefits will put downward pressure on continuing claims.
Consumer sentiment was steady in early February, according to the University of Michigan index. Consumers appear to have more positive expectations for the U.S. economy.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly021414.