June 2014, Comerica U.S. Economic Update

Q2 GDP Rebound Is in Gear, Green Light for 2014H2

The confluence of events that added up to –1.0 percent real GDP growth in 2014Q1 will not be repeated. The weather has normalized. After a sizeable inventory correction in Q1, we expect to see less drag from inventories going forward. The drag on federal spending from the budget sequester is winding down. Even though Q2 international trade got off to a weak start, we expect the fundamental changes to the U.S. energy sector, and the related strengthening of the U.S. manufacturing sector, to exert a positive influence on the balance of trade going forward. We forecast real GDP growth for the current quarter to rebound at a moderate 2.6 percent annualized rate, and then to improve to about 3.0 percent for Q3 and Q4 of this year.

Recent economic indicators are consistent with this view. The May ISM reports for manufacturing and non-manufacturing industries both point to a solid second quarter. After revision, the ISM Manufacturing Index for May increased to 55.4, showing that manufacturing conditions are generally improving. There are some exceptions. U.S. Steel announced this week that it would temporarily close plants in Texas and Pennsylvania, blaming unfair competition from illegally priced imports of tubular steel. The ISM Non-Manufacturing Index for May increased to 56.3 percent. Light vehicle sales for May were better than expected, increasing to a 16.8 million unit annual pace, with help from both cars and light trucks. This was the strongest reading for auto sales since July 2006. Although we expect to see a correction in the June sales data, the trend for light vehicle sales for the remainder of this year looks positive.

May payroll job growth came in slightly-better-than expected at +217,000. The May jobs numbers are a double shot-in-the-arm for the U.S. economy. First, they confirm a durable rebound from this winter’s weather-induced poor performance. Second, May’s job growth puts U.S. payroll employment at a new all-time high. May’s total payroll employment of 138,463,000 is 98,000 jobs higher than the January 2008 pre-recession peak. The May unemployment rate was steady at 6.3 percent.

With conditions improving, the Federal Reserve will look past the temporarily dismal performance of Q1 and continue to taper their asset purchase program. We expect to see another $10 billion reduction in the pace of asset purchases announced at the conclusion of the upcoming June 17/18 FOMC meeting. The Fed will be finished with active QE by the end of this year. We expect to see no changes to the near-zero interest rate policy this year. For more discussion on the Federal Reserve and European Central Bank, please see page 2.

For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate0614.

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