April 2014, Comerica U.S. Economic Update

It’s a Spring Thaw for the U.S. Economy

Recent data for the U.S. economy show a spring thaw in progress after one of the worst winters on record for parts of the upper Midwest. Consumer spending is picking up, companies are producing more and hiring more workers and houses are being built. Credit is flowing and confidence indexes are improving. We still expect to see a very weak 2014Q1 GDP report at the end of this month. Not only was the bad weather a drag through Q1, but  federal discretionary spending was still contracting and we expect to see a renormalization in inventories after last fall’s surge in both farm and nonfarm inventories. If Q1 comes in as weak as we expect, there is a danger that improving confidence will be throttled back, dragging on Q2 economic activity. Hopefully, consumers and businesses will respond to the clearing skies and calming seas in front of them, rather than to the stormy passage behind them.  With more confirmation of improving fundamentals, we expect to upgrade our Economic Outlook rating soon. We have not yet been above a C+ rating in its brief history, since September 2011.

In a benign economic environment the Federal Reserve will try to unwind extraordinary policy steadily and predictably, but without explicit forward guidance to box them in. We expect the Yellen Fed to be a little more boring than the Bernanke Fed simply because the times are different. Bernanke’s job was to surprise a very bad economy in a good direction. Yellen’s goal will be to avoid bad surprises in an improving economy. At their upcoming April 29/30 meeting, we expect the FOMC to announce another $10 billion reduction in its asset purchase program. We continue to expect to see the first increase in the near-zero fed funds rate around mid-year 2015, as early as the end of April, as late as mid-September.

Job growth got back on track in February and March after a weak December and January. In February 197,000 jobs were added. March saw 192,000 net new payroll jobs. Recently stronger labor force growth may be a developing trend. If it is, that could bring the unemployment rate down more slowly than previously thought. We have increased our estimate of labor force growth this year in our April forecast. Consequently, the unemployment rate declines more slowly for the remainder of this year than previously estimated. That does not imply a net worsening of the outlook. The unemployment rate is simply not a well-calibrated measure of economic activity. Vehicle sales stepped up in March to a 16.4 million unit rate. The bounce-back in sales was likely propelled by demand pent up over the winter. Light truck sales in particular were stronger than expected, which is a positive indicator for construction. We look for slightly weaker vehicle sales in April consistent with an overall improving trend.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate0414.

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