Weak Q1 But Fundamentals Still Look Good
We expect to see a weak first quarter when the advance estimate of 2014Q1 GDP is published at the end of April. Weather impacted almost all economic metrics this winter. Personal consumption was shifted away from discretionary purchases, like automobiles, and toward non-discretionary services, like home heating. Business investment was hampered by bad weather. Likewise residential investment. Trade is not expected to be a large positive contributor in Q1. Inventories may be a large negative contributor, as inventory accumulation moderates following two strong quarters. Federal government spending will still be a drag, although it will be less of a drag now that we have a two-year budget deal in place. State and local government spending is expected to be a positive contributor to Q1 GDP. So we show weak real GDP growth of just 1.0 percent (annualized rate) in Q1, followed by a pickup to what we can call the new “moderately strong”, real GDP growth in the neighborhood of 3 percent.
We see a powerful positive for the economy in the form of improving household wealth. Stronger house prices, climbing equity prices and a tightening labor market are driving gains in household wealth. The net worth of households and non-profits increased by 14 percent in 2013 ($10.6 trillion), hitting a level of $80.7 trillion, surpassing the pre-recession peak. As wealth accumulates, households feel more comfortable satisfying demand and utilizing credit (a positive wealth effect). This is a very powerful and broad-based support for consumer spending.
While most recent U.S. economic data has been weaker than expected due in part to the weather, job creation in February was stronger than expected. Payroll jobs for February increased by 175,000. Expectations for job growth fell after the ADP survey showed a gain of 139,000 private sector jobs for the month, and the ISM Non-Manufacturing Index for February showed contracting employment. The household survey of employment did show some weather effects for the month, and posted a weak overall gain of 42,000 jobs. The weak gain in the volatile household employment series, combined with a strong gain in the labor force, drove the unemployment rate back up to 6.7 percent. That should not be interpreted as a sign of a weakening labor market.
U.S. monetary policy remains highly stimulative. We expect the Federal Reserve to maintain the near-zero fed funds rate until mid-2015. The better-than-expected labor data for February will allow the Fed to taper its asset purchase program by another $10 billion at the upcoming March 18/19 FOMC meeting. This will bring purchases down to $55 billion per month. We expect the Fed to reduce asset purchase in $10 billion increments at each meeting this year, possibly eliminating asset purchases at the October 28/29 meeting.
For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate0314.