Lots of data, lots of Fedspeak, lots of commentary from the Trump Administration. We think that the net result will be positive for the U.S. economy, but it does give us a flashback to the Great Recession when uncertainty was high. For a discussion of economic uncertainty, please see page 2.
Janet Yellen delivered her semiannual testimony to House and Senate committees this week. Her monetary policy comments were somewhat hawkish. She said that “waiting too long to remove accommodation (raising interest rates) would be unwise…” Moreover, that line was echoed this week by Dallas Fed President Kaplan, Richmond Fed President Lacker and Boston Fed President Rosengren. We view this as a strong signal from the Fed that interest rates will be rising soon. By the end of this week, the implied probabilities from the fed funds futures market had shifted forward. The cumulative implied odds of a March 15 fed funds rate hike are now 18 percent. May 3 gets 44.1 percent. June 14 gets 67.4 percent. This distribution still feels too low. We would add about 10 percent to the odds for each meeting.
Along with monetary policy uncertainty, we are also in a period of fiscal policy uncertainty. Two major fiscal initiatives from the Trump Administration have yet to be defined: infrastructure spending and tax reform. We believe that both initiatives will result in positives for the U.S. economy, but scaling, timing and applying those positives to an economic forecast are still impossible. The final form of fiscal stimulus and tax reform will undoubtedly be different from the starting point, evolving as legislation works its way through Congress this summer.
Retail sales for January were stronger than expected, showing ongoing strength in most categories of consumer spending. Total retail sales increased by 0.4 percent, boosted by higher gasoline prices, which ramped up sales at service stations by 2.3 percent for the month. Hiring, wage growth, increasing consumer confidence, higher house prices and a climbing stock market are all positives for consumer spending this spring.
Inflation data showed the impact of higher energy prices. Both the Producer Price index and the Consumer Price index were hotter than expected in January. The Headline PPI gained 0.6 percent for the month, as did the headline CPI.
Industrial production fell by 0.3 percent in January, weighed down by a reset in utility output, which has been lurching due to weather. Manufacturing output was up by 0.2 percent for the second month in a row. Mining output gained 2.8 percent in January, reflecting higher rig counts and more oil drilling activity.
Housing starts dipped by 2.6 percent in January. Single-family starts rebounded from their December dip, up 1.9 percent in January. Multifamily starts went the other way, falling by 7.9 percent after surging in December. Forward-looking permits increased by 4.6 percent in January to a 1,285,000 unit annual rate as multifamily permits rebounded from a December slump.
Initial claims for unemployment insurance increased by 5,000 for the week ending February 11, to hit 239,000. Continuing claims eased, down by 3,000 to hit 2,076,000 for the week ending February 4. These are very good numbers that show tight labor market conditions.
The Conference Board’s Leading Economic Index increased by 0.6 percent in January. This was the strongest monthly increase since June 2015. The Coincident Index and the Lagging Index were also positive.
Small business optimism remained strong in February according to the NFIB.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_ 02162017.