Comerica Economic Weekly

It has been an active week for economic developments. U.S. economic data was generally positive this week, despite the miss on March payroll employment. We saw some discussion in the minutes of the March Federal Open Market Committee meeting that suggests that they will begin to roll-off maturing assets before the end of this year. On Thursday evening, the United States launched a Tomahawk missile attack on an airbase in Syria, resulting in a small upward movement in crude oil futures. Syria is not a major oil producer and its production capacity has deteriorated significantly in recent years. However, Syria’s proximity to other major oil producers and oil distribution routes adds some uncertainty to future oil prices. There are reports of a possible terrorist incident in Sweden this morning.

Despite the strong ADP jobs report for March, released on Wednesday, the official Bureau of Labor Statistics jobs report for March showed a much weaker-than-expected 98,000 net new payroll jobs. In contrast to the weak payroll survey, the household survey of employment recorded another very strong month, surging by 472,000 jobs after a similar 447,000 job gain in February. The household employment numbers feed into the unemployment rate, and brought it down more than expected, to a tight 4.5 percent.

We expect to see a stronger jobs report for April, to be released on May 5, after the upcoming FOMC meeting over May 2 and 3.  The weak March payroll data will not, by itself, change Federal Reserve monetary strategy. The Fed will see two more jobs reports before the June 13 and 14 FOMC meeting. We expect the Fed to leave interest rates unchanged on May 3 and then to increase the fed funds rate range by 25 basis points on June 14. The implied odds of a fed funds rate hike on June 14 are about 63 percent, according to the fed funds futures market.

The ISM Non-Manufacturing Index fell from 57.6 in February, to a still-positive 55.2 in March. The ISM Manufacturing Index for March eased to a still-positive 57.2 in March, indicating ongoing improvement in the nation’s manufacturing sector. Together, the two ISM reports suggest that the rate of overall business activity remained positive, but eased at the end of Q1.

Construction spending for February gained 0.8 percent, boosted by private multi-family projects.

Vehicle sales for March stepped down to a 16.7 million unit annual rate, after hitting a 17.6 million unit rate in February. Bad weather was a possible factor, but the step down in March vehicle sales is consistent with widely held expectations of lower auto sales this year, after last year’s record rate. Several factors suggest that there could be a flat top to the auto sales cycle, rather than a steep peak, following by a valley. First, the unemployment rate, at 4.5 percent is very low. Conversely, consumer confidence is up. The percent of household income spent on autos is low, suggesting that there is upside potential and the average age of the auto fleet remains high.

Applications for home mortgages for purchase increased through the second half of March, while applications for refinance fell. According to the Mortgage Bankers Association, rates for 30-year fixed-rate mortgages eased through the second half of March.

U.S. crude oil inventories increased through the second half of March, putting downward pressure on prices. However, increased tensions in the Middle East will add a risk premium to prices, likely offsetting the effect of the U.S. inventory gain.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_ 04072017.


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