May 2014, Comerica U.S. Economic Update

After a Rough Start, 2014 Is Gaining Momentum; The New 2004

U.S. GDP for 2014 stumbled out of the starting blocks in the first quarter. This will keep GDP growth in the moderate range for this year despite signs of increasing momentum in Q2 and likely beyond. As expected, the first estimate of 2014Q1 real GDP growth was a clunker, registering a barely positive 0.1 percent, essentially no growth. Four factors lined up to suppress first quarter GDP: (1) the severe winter weather shifted personal consumption patterns and restrained fixed investment; (2) nonfarm inventories corrected after surging through the second half of last year; (3) exports fell, so net trade was a drag; and (4) government spending fell, exacerbated by the federal spending sequester. It is very important to note that all four negative factors are temporary and expected to abate soon. GDP is a backward looking report. Leading and coincident indicators for the U.S. economy are going in the right direction. We expect real GDP growth for the remainder of 2014 to show a significant improvement from the anemic first quarter.

In some ways, 2014 is showing parallels to 2004. After the recession of 2001, the recovery was weak. That is when the phrase “the jobless recovery” was in vogue. By late 2003, into 2004, hiring finally began to pick up momentum. Meanwhile the fed funds rate was still stuck at a very low 1.0 percent until mid-year 2004. We expect the fed funds rate to remain stuck lower for an even longer period now, until mid-year 2015. As Mark Twain said, “history doesn’t repeat, but it does rhyme.” If 2014 is the new 2004, we should consider this to be a maturing expansion, with a few more years to go before the next down cycle.

Labor market conditions are improving significantly after a winter lull. Not only did April payroll job growth beat expectations at 288,000 jobs but March and February job growth was revised up. Adding April’s 288,000 jobs, to the upward revisions for March and February means that we have 324,000 more payroll jobs in the economy than we thought we had a month ago. That is enough employment to account for a medium-sized city. The recent strong job growth is a very favorable forward-looking indicator that should give us comfort in looking past the weak GDP report for the first quarter. The unemployment rate for April dipped to 6.3 percent, breaking through the Federal Reserve’s now abandoned 6.5 percent threshold level.

We expect the Federal Reserve to stay the course. Asset purchases will get tapered down in measured steps ($10 billion increments) until the program is eliminated by the end of this year. We expect liftoff for the near-zero fed funds rate to come at mid-year 2015, with the fed funds rate hitting 1.0 percent by year-end 2015.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate0514.

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