Comerica Economic Weekly

The Federal Reserve dominated this week’s U.S. economic headlines as they did the expected, more tapering and no change to interest rate policy. The Federal Open Market Committee policy announcement on Wednesday called for a reduction in asset purchases to $35 billion beginning in July and no change to near-zero interest rate policy. In her post-announcement press conference, FOMC chairwoman Janet Yellen said that the Fed would be issuing a revised set of exit (from extraordinary monetary policy) principles later this year. The Yellen Fed has two significant challenges ahead of it. The first is the timing and the execution of the pivot from extraordinary monetary policy to something that could be called the new new normal. The second challenge is how to communicate about the pivot. The pivot and eventual interest rate lift-off is complicated by the proliferation of policy levers that the Fed may employ, including the fed funds rate, the interest rate on excess reserves, term deposits and overnight reverse repurchase agreements.

U.S. economic data remain consistent with a Q2 GDP rebound and ongoing moderate economic expansion through the second half of the year.

Industrial production increased by 0.6 percent in May as manufacturing rebounded from a sluggish April. Overall capacity utilization increased to 79.1 percent, still below the 40-year average.

Residential construction activity eased in May, following a strong April. Overall trends still look positive. Housing starts declined by 6.5 percent for the month, to hit an annual rate of 1,001,000 units. Permits dipped by 6.4 percent to hit a 991,000 unit annual rate.

The Conference Board’s Leading Index gained 0.5 percent in May, its fourth consecutive gain. The Coincident and the Lagging Indexes were also up.

Initial claims for unemployment insurance for the week ending June 14 decreased by 6,000 to hit 312,000. Continuing claims fell by 54,000 for the week ending June 7 to reach 2,561,000. UI claims data remain consistent with ongoing improvement in labor market conditions.

 The Federal Reserve Bank of Philadelphia’s Business Outlook Survey increased in June, showing a notable improvement in the future activity index. The New York Fed’s Empire State Manufacturing Survey for June also showed solid manufacturing conditions, maintaining the strong index level from May.

The week’s most intriguing data point was the May Consumer Price index, up a strong 0.4 percent, the third consecutive step up for consumer price inflation. Over the previous 12 months, the headline CPI is now up 2.1 percent and core CPI (less food and energy) is up 2.0 percent. While the flames of inflation are not yet burning, the embers are warming up.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 06-20-14.

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