March 2015, Comerica U.S. Economic Update

The U.S. jobs machine remains in high gear. Despite bad weather, 295,000 payroll jobs were added on net in February. Job gains were broad-based but there was a decline in the mining sector of 9,300 jobs, consistent with lower crude oil prices and the steep drop in the U.S. rotary rig count. This loss of 9,300 jobs does not align with the much larger announced layoffs and other anecdotal reports of cutbacks in the oil patch, so we expect to see larger job losses reported for mining in the months ahead. The unemployment rate fell from 5.7 percent in January to 5.5 percent in February, and remains on track to end this year at or below 5.0 percent. Over the previous 12 months average hourly earnings for all workers are up a modest 2.0 percent, but consumer price inflation is weak at -0.1 percent over the year ending in January. In other words, the drop in energy prices has been a boon to households despite modest real wage gains. We expect to see more wage inflation through the second half of this year as labor markets tighten up.

Recent Federal Reserve communications have been geared toward setting expectations for interest rate lift-off this year, while at the same time giving the Fed maximum maneuvering room with respect to the exact date of lift-off. As we move through 2015, getting closer to the date of lift-off, the Fed will attempt to gradually focus market expectations. In the March 18 monetary policy announcement, we expect to see further focusing in the form of a modification of forward guidance on interest rates. The relevant passage in the January 28 policy announcement reads, “… the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.” We expect the Fed to remove the word “patient” from the March 18 announcement, effectively initializing a countdown for interest rate lift-off, to commence either on June 17 or September 17. The June and September FOMC meetings each have a press conference scheduled, making them preferable to the Fed by providing a venue that allows them to influence the financial reporting on interest rate lift-off. Currently, the July 28-29 meeting does not have a press conference scheduled. There is no requirement that the first step in interest lift-off be a 25 basis point increase in the fed funds rate. The FOMC may choose to lift-off with a smaller first step, say 12 basis points. This could accomplish three things. A smaller first move could be a compromise offered to those on the FOMC that favor a later date for lift-off. It would allow the news media to report on an event that, by itself, would have little practical consequence for the U.S. economy. It would reinforce expectations for a shallow trajectory for lift-off.

 For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate_03_2015.

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