It was a busy week for U.S. economic data, the majority of which was positive and consistent with an ongoing moderate economic expansion through the first quarter of 2017.
The big non-news for the week was the Federal Reserve monetary policy announcement. The Fed on Wednesday afternoon said that they will leave the fed funds rate unchanged for the time being. There was little new news in their policy announcement, just a little more emphasis on inflation. The Fed will be highly attuned to inflation indicators this year as they discuss the timing and pace of future fed funds rate hikes. Financial markets remain focused on June 14 as the most likely date for the next fed funds rate hike. If the Fed wants to hike on March 15 or May 3, they will need to bring market expectations forward in order to avoid an unpleasant lurch.
Job growth was stronger than expected in January. Payroll jobs increased by 227,000 for the month. The household survey has been out of synch with the payroll survey and this has allowed the unemployment rate to tick up over the past two months to 4.8 percent. This is not a meaningful move. We expect the household survey to snap back soon, keeping the unemployment rate in the range of 4.6 to 4.8 percent, indicating tight labor market conditions.
Initial claims for unemployment insurance fell by 14,000, to hit 246,000 for the week ending January 28. Continuing claims fell by 39,000, to hit 2,064,000 for the week ending January 21. These are very low numbers, especially if you scale them to the size of the labor force.
Productivity growth remains weak. The first estimate of 2016Q4 productivity growth was 1.3 percent annualized. Low productivity growth implies that wage growth will tend to be more inflationary, so it factors into the Fed’s interest rate expectations.
The ISM Manufacturing Index for January increased from December’s 54.5 to 56.0, indicative of good and improving conditions for U.S. manufacturers. Seven out of ten sub-indexes improved in January, including new orders, production and employment. The prices index was the highest of the ten sub-indexes, reaching a very strong 69.0, consistent with warming inflation.
The ISM Non-Manufacturing Index for January was essentially unchanged from December, easing slightly to 56.5, indicating ongoing positive conditions for the largest part of the U.S. economy. Production, new orders and employment sub-indexes continue to be positive. The prices sub-index increased from 56.1 in December, to a strong 59.0 in January, indicating some inflationary pressure.
Construction spending eased in December, down 0.2 percent. Private residential spending was up by 0.5 percent for the month, reflecting the rebound in multifamily housing starts. Private nonresidential spending was unchanged. Public construction spending fell by 1.7 percent with declines widespread across categories.
House prices appreciated more than expected in November, indicative of tight real estate markets. According to the Case-Shiller U.S. National Home Price Index, prices gained 0.8 percent in November, after seasonal adjustment, and were up 5.6 percent over the previous 12 months. Even though prices were strong in November, we have already seen that sales of both new and existing homes were soft in December. It is too early to say that weak sales at year-end were a result of higher mortgage rates, but there is some downside risk to the housing market, especially if mortgage rates rise more quickly through the second half of this year.
Auto sales eased as expected in January, down from the robust 18.4 million unit pace of December, to a still-strong 17.6 million unit pace in January. Domestic car sales remain a weak link.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_ 02032017.