We approach the end of the year with the price of oil, the health of the Russian economy and the Federal Reserve as hot topics this week. WTI crude oil traded in a range of about $54 to $58 per barrel this week. This hardly represents a firm bottom against the now six-month slide in global oil prices. We see the balance of risks on oil prices weighted to the downside given three fundamental assumptions. (1) Saudi Arabia continues to protect its market share, and therefore cuts prices in order to maintain sales volume. (2) Global oil production increases before it decreases. (3) Global oil demand does not rapidly increase even with rapidly-falling prices.
The oil and gas company known as Russia is buckling under the weight of economic sanctions and weak oil prices. We expect to see some volatility in global financial markets because of this, but we do not expect economic and financial events in Russia to have enough weight to grow into a significant headwind for the U.S. economy.
Looking past the transitory deflation due to lower oil prices and global economic and geopolitical uncertainty, the Federal Reserve took another step in its pivot toward policy normalization this week by changing its forward guidance on interest rates. “Patient” replaces “considerable time.” In her post-policy announcement press conference, FOMC chairwoman Janet Yellen bracketed the timing of interest rate lift-off by saying that the FOMC expects to see interest rate lift-off no earlier than April 2015, and no later than December 2015. Our expectations remain centered on a mid-year 2015 date for interest rate lift-off.
U.S. home construction remains range-bound near the 1 million units per year mark. Even though homebuilder sentiment is improving, builders will not get ahead of lackluster sales. Housing starts in November dipped by 1.6 percent to a 1,028,000 unit pace.
Industrial production, by contrast, had a banner month in November. The headline industrial production index increased by a strong 1.3 percent. Motor vehicle assemblies surged by 7.9 percent in November, supported by the strong 17.2 million unit sales rate for the month.
In the second week of December the Baker Hughes rotary rig count for the U.S. had the biggest one-week slide since March 2013, falling by 27 rigs to 1,893. Still a strong number, but clearly off the September peak.
The Conference Board’s Leading Economic Index increased by 0.6 percent in November. The Coincident Index and the Lagging Index were also up for the month.
The headline consumer price index eased by 0.3 in November as crude oil prices slid and gasoline followed suit. According to AAA, the national average price for regular unleaded is now down to $2.45 per gallon.
Initial claims for unemployment insurance fell by 6,000 for the week ending December 13, to hit 289,000. Continuing claims for December 13 fell by 147,000.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 12-19-14.