Comerica Economic Weekly

It was early March Madness at the Federal Reserve as team Yellen exerted a full court press to pull interest rate hike expectations forward. They succeeded. Yellen capped a flurry of Fedspeak this week with her speech today saying that a fed funds rate hike on March 15 will likely be appropriate. Interest rates increased through the week and U.S. equity markets remained stable after strong recent gains, giving the Fed the green light for a near-term rate hike. The Fed goes into their pre-meeting communication blackout period tomorrow, so we will not hear anything more from team Yellen. The last major data point to digest before the March 14/15 FOMC meeting will be the February employment report, due out 7:30 am central time on Friday, March 10. A solid job gain for the month of February, of at least 120,000 net new jobs, plus a reasonable gain in average hourly earnings, after January’s weak increase, would seal the deal.

Economic data this week was mixed, and suggests that the curse of weak Q1 GDP may be back with us this year. We will likely be revising our estimate of first quarter real GDP growth downward in our upcoming March U.S. Economic Outlook. However, this does not change our view that the U.S. economy is gaining momentum.

The income and consumer spending numbers for January are consistent with weaker-than-expected real GDP growth. Nominal income was good, gaining 0.4 percent for the month, supported by moderate growth in wages and salaries, and strong growth in rents. However, inflation was hotter than expected and ate up the gain. The personal consumption expenditure price index gained 0.4 percent for the month. Consumer spending was challenged by the reset in auto sales after the December surge and warmer-than-normal temperatures. After adjusting for inflation, real consumer spending fell by 0.3 percent in January, which will be a drag on Q1 GDP.

U.S. auto sales were unchanged at a 17.6 million unit pace in February with strong dealer incentives. This is a good number, and sales are holding up better then expected, but total Q1 sales will likely step down from Q4.

The value of construction put in place fell by 1.0 percent in January as total public construction dropped by 5.0 percent. Private nonresidential was unchanged. Private residential increased by 0.5 percent, despite the small dip in housing starts for the month.

Now for the good economic news. The ISM Manufacturing Index for February increased to a strong 57.7 percent. Nine out of 10 sub-indexes were above 50 and most increased in February. The new orders index was robust at 65.1 percent. Production was not far behind at 62.9. Employment was solid at 54.2. Anecdotal comments were positive. Seventeen out of 18 industries reported growth in February; only furniture reported contraction.

The ISM Non-Manufacturing Index increased to a strong 57.6 percent in February. All 10 sub-indexes were positive. Most industries reported growth.

Unemployment insurance claims through February are trending down to exceptionally low levels. Initial claims for unemployment insurance for the week ending February 25 fell by 19,000 to hit 223,000, the lowest level since March 31, 1973.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_ 03032017.

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