U.S. data was mixed this week. Q1 GDP growth was tepid, but March new home sales were strong.
2017Q1 real GDP registered a sluggish 0.7 percent annualized growth rate, about as expected. Personal consumption expenditures increased at a very low 0.3 percent annualized rate due to falling car sales and warm weather. Good news came from business fixed investment which increased at a strong 9.4 percent annual rate. Residential fixed investment was also strong, increasing at a 13.7 percent annualized rate.
Sales of new single-family homes increased in March by 5.8 percent, hitting a 621,000 unit annual rate, continuing their upward trend.
The Employment Cost index for March showed a 0.8 percent month-over-month increase in compensation for civilian workers. This continued an increasing trend visible since early 2013. Tight labor market conditions are driving wages up.
Initial claims for unemployment insurance increased by 14,000 for the week ending April 22, to reach 257,000. Initial claims are showing a little volatility now on a week-to-week basis, but the longer-term trend still looks very favorable. Continuing claims for the week ending April 15 gained 10,000 to hit 1,988,000, still exceptionally low, below the two million mark.
New orders for durable manufactured goods increased by 0.7 percent in March, the third consecutive solid monthly gain. In March, new orders were supported by another increase in commercial aircraft orders and by rebounding defense aircraft orders. The core measure of durable goods orders, nondefense capital goods excluding aircraft, increased by 0.2 percent in March, after similar gains in January and February.
Both fiscal and monetary policy levers are in play in Washington D.C.
The Trump Administration unveiled the broad contours of their tax reform agenda on Wednesday. The initial proposal for personal taxes would reduce brackets from seven to three, with base rates of 10 percent, 25 percent and 35 percent. Trump wants to lower the corporate tax rate from 35 percent to 15 percent and shift to a territorial system where U.S. companies only pay taxes on income related to the U.S. This was just the opening public position for the Trump Administration. What emerges from Congress, hopefully before the end of this year, may be a different story.
The Federal Open Market Committee will meet over this coming Tuesday and Wednesday to discuss the economy and monetary policy. We expect the Fed to leave interest rates unchanged next week, and then to raise the fed funds rate range by 25 basis points on June 14. We also look for more communication about the timing, phasing and mechanics of balance sheet reduction over the course of the summer.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: Comerica_Economic_Weekly_ 04282017.