Strong U.S. economic data are raising expectations for the remainder of the year after a weak Q1. So far this month, two nagging questions about the U.S. economy have been answered. The first nagging question was about the rate of hiring. We can now say that hiring has accelerated after a soft March. The second nagging question was about consumer spending. We can now say that consumers are responding positively to better jobs, increased pay and low energy prices.
For the soon-to-be completed Q2 we expect real GDP growth to rebound from the sagging -0.7 percent contraction of Q1 to about +2.8 percent. The combination of strong job growth and confident consumer spending is a powerful accelerator. We expect to see more lift in the housing sector and in business investment through the remainder of this year.
Retail sales bounced back after three consecutive monthly declines from last December through February. March sales gained a strong 1.5 percent. April was more moderate at a 0.2 percent increase, and in the latest numbers from May, we see another strong gain of 1.2 percent. May retail sales were fortified by the surge in unit auto sales to a 17.8 million unit annual rate.
April business inventories increased by 0.4 percent, also supportive of Q2 GDP.
Initial claims for unemployment insurance increased inconsequentially, by 2,000, to hit 279,000 for the week ending June 6. Continuing claims for the week ending May 30 increased by 61,000, to reach 2,265,000, also a very good number.
The Job Openings and Labor Turnover Survey (JOLTS) for April showed an uptick in the rate of hiring, to a strong 3.7 percent.
The National Federation of Independent Business’s Small Business Optimism Index for May increased to 98.3 in May as hiring plans improved.
Firming energy prices brought producer prices up in May. The producer price index for final demand increased by 0.5 percent, its strongest monthly gain since September 2012. Over the previous 12 months the index is still down by 1.1 percent. But if oil prices remain in the $55-60 range, or increase, then year-over-year price comparisons will start to renormalize.
Along with raising our expectations about U.S. economic performance, strong recent data are reinforcing our expectations about Federal Reserve monetary policy. We continue to expect the FOMC to initiate its first fed funds rate increase since June 2006 at its September 16/17 meeting. Fed funds futures also point to a September rate increase.
We expect to see no changes to monetary policy announced at the upcoming June 16/17 FOMC meeting. However, the Fed will likely acknowledge better recent economic performance and firming inflation. Also, we will see the next “dot plot” showing FOMC members’ expectations for the fed funds rate.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 06-12-15.