June 2015, Comerica U.S. Economic Update

The mystery number known as Q1 real gross domestic product growth is currently set at -0.7 percent. That may not be its final resting place. On July 30, the Bureau of Economic Analysis will release its annual revision for the national income and product accounts (NIPA); this includes GDP. The BEA will revise estimates for GDP going back three years, including the somewhat controversial 2015Q1 number. Seasonal adjustment factors to some components of GDP may be revised enough to swing the headline growth rate barely positive. The unfortunate pairing of the weak Q1 GDP numbers with a soft March payroll jobs gain (now revised up to +119,000) was a wet blanket on consumer and business confidence readings.

Fortunately, more recent data provides strong support that the soon-to-be-completed second quarter was a step in the right direction for the U.S. economy. We expect to see real GDP rebound to about a 2.8 percent growth rate for Q2, and remain near that rate through 2015Q3 and Q4. Hiring is on the increase, as shown in the April Job Openings and Labor Turnover Survey (JOLTS) data. Payroll job growth in April accelerated to 221,000 jobs, and then surged in May to 280,000. We do not expect job growth to be sustained indefinitely at the strong May rate, but neither do we expect to see a sudden downshift in job growth. Rather, what we expect to see is a gradual easing of job growth to around 200,000 jobs per month by the end of this year, and then easing further through 2016. This will not be a bad thing, and there will still be enough job growth to maintain a downward trend in the unemployment rate. Retail sales also surged in May by 1.2 percent, suggesting that real consumer spending, which was missing in action over the winter months, is re-emergent, supported by strong job growth. The May unit auto sales rate of 17.8 million units was a strong signal that consumer confidence is not as wobbly as the April and May numbers suggest.

Meanwhile, back at the Fed, Federal Open Market Committee voters are digesting the call from the International Monetary Fund’s Christine Lagarde to delay the first increase in the fed funds rate until 2016. We believe that recent strong U.S. data trumps the cautionary request from the IMF, and the FOMC remains on track to begin increasing the fed funds rate this year, possibly in September. Strong U.S. job growth and stabilizing U.S. inflation are the drivers for the Fed’s data-dependent decision. Communication about the first increase in the fed funds rate since June 2006 is changing. Instead of using the overly dramatic phrasing “interest rate lift-off,” Fed Governor Stanley Fischer has described the event as the start of a “crawl” toward normalizing Fed monetary policy. Treasury bond yields have already begun crawling. The yield on 10-Year T-Bond is up 70 basis points since early February.

 For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate_06_2015.

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