Indicators Positive, Fed Signals Ongoing Unwind from Extraordinary Policy
- The Leading Economic Index for February increased by 0.5 percent, suggesting a spring thaw is coming.
- Existing Home Sales for February fell slightly to a 4.60 million unit annual rate.
- Initial Claims for Unemployment Insurance gained 5,000 for the week ending March 15, to hit 320,000.
- The Federal Open Market Committee voted yesterday to reduce asset purchases in April.
U.S economic metrics released this morning were generally positive and suggestive of an impending spring thaw. The Conference Board’s Leading Economic Index increased by 0.5 percent in February, after stalling in December and January. The coincident and lagging indexes were also positive for the month. The five factors that pushed the leading index up in February were interest rate spread, residential building permits, the leading credit index, manufacturers’ new orders for consumer goods and manufacturers’ new orders for capital goods ex-aircraft. Summed up, the leading, coincident and lagging indicators gained a combined 1.0 percent in February, after gaining 0.7 percent in January and 0.3 percent in December.
Existing home sales edged down in February, as we expected. February sales dipped by 0.4 percent to a 4.60 million unit rate. Four negative factors were in play in February – mortgage rates above recent historic lows, bad weather, soft jobs data and less activity from institutional buyers and investors. As other economic metrics, including job creation, step up this spring, we expect existing home sales to first stabilize near current levels, and then resume an upward track, boosted by rising demand from traditional buyers.
Initial claims for unemployment insurance increased by 5,000 for the week ending March 15, to hit a level of 320,000. Initial claims appear to be stabilizing at a level consistent with ongoing moderate job growth, another signal that the winter freeze out in job creation will prove to be temporary. Continuing claims for the week ending March 8 increased by 41,000 to hit 2,889,000. We see an overall declining trend in continuing claims since early January, as expected, following the elimination of federal benefits for extended unemployment.
The Philadelphia Federal Reserve Bank’s Business Outlook Survey showed that current manufacturing conditions improved in early March, after deteriorating in February.
As widely expected, the Federal Open Market Committee voted yesterday to reduce its asset purchase program by another $10 billion, to $55 billion per month. The reduced monthly rate of purchases will begin in April. The Fed remains on track to eliminate this program by the end of this year, possibly by the end of October. The fed funds rate remains set near zero. Forward guidance for the fed funds rate has been modified. The Fed has backed away from an explicit unemployment rate target. We expect the fed funds rate to remain near zero until the second or third quarter of 2015. As the Fed gets closer to raising the fed funds rate, they will modify their forward guidance again, alerting markets to the forthcoming change. At this time the FOMC is not formally signaling any changes to fed funds rate policy. However, at her first post-meeting press conference, FOMC chairwoman Janet Yellen suggested that the first increase in the fed funds rate might come about six months after the end of its asset purchase program. Six months after the end of October 2014, is the end of April 2015. The FOMC could announce an increase in the fed funds rate target at its end of April 2015 or mid-June 2015 meetings. The FOMC acknowledged the economic drag from the unusually harsh winter. Other economic comments by the FOMC were generally positive.
Market Reaction: Equity markets are up after a weak opening. Treasury yields are up at the long end of the yield curve. The 10-Year Treasury bond yield is up to 2.78 percent. NYMEX crude oil is down to $99.19/ barrel. Natural gas futures are down to $4.36/mmbtu.
For a PDF version of this Comerica Economic Alert click here: Leading Indicators 03-20-14.